Reward cards responsible for more spending and debt

According to researchers at Chicago’s Federal Reserve Bank, cash back credit cards encourage credit card customers to spend more and thereby build on the dent. The 1% cash rewards scheme for example led to about 25 dollars in savings on an average thereby resulting in an increase in spending of 68 dollars on an average. The increase in credit card debt was about 115 dollars a month on a average according to the research by some economists.

Credit card issuers have been able to attract customers by offering a wide range of rewards programs, including airplane miles, cash back and discounts at hotels and restaurants. In fact a whopping 6 billion reward schemes were offered to customers in 2005. The truth is that even smaller rewards can entice the customers to spend more. Some of these rewards are aimed to entice people to spend on those cards which were dormant for a while. In fact the first month of the scheme saw 11% of the customers spend at least 50 dollars on these cards, while they hadn’t used them in the previous 3 months.

This research was based on a deeper look by the economists at 12,000 credit card accounts at a single financial institution. While some customers were offered cash back rewards others weren’t. The debt grew in case of those customers who were offered the cash back rewards. This was indicated by the fact that many card customers saw a decline in the monthly payments they make while their expenses increased. This extra debt could indicate one of two things. People started spending more in general or shifted to cash back cards compared to other cards they owners. The benefits offered by the cash back rewards scheme was in turn negated out by the extra spending and debt that most of the card customers got into.

Another observation is that although credit card customers are expected to transfer all their debt to one card, they end up building extra debt. Another factor that has contributed to increase in spending on credit cards is the reduced interest rate on outstanding balance. Lower interest rates have made a lot of customers move to these cards and also increase their expenses. So it is true that small reward programs work in favour of the card issuers especially in a competitive credit card market. Rewards are a strategy to steal customers from the competitors.