January 20, 2011

Rewards Cards Impact on Spending & Debt

A recent post in Consumerism Commentary pointed to an interesting study on the impact of rewards credit cards on card user spending and debt levels.  The study titled Why Do Banks Reward their Customers to Use their Credit Cards? is from the Chicago Federal Reserve.

This study was unique in that it didn't pile all credit card users into one large group and then average out their habits.  Instead it split card users into different categories based on whether or not they carried balances or if they use cards previously.

People who carry Debts

For people who carry debt month to month the study found that on average that group increased spending and increased their debts when using rewards cards.  The study says that debt goes up $134 average per month and spending increases $138 average per month in the first quarter for consumers  with debts.  The people who have existing debts end up with more debt and spending.   The rewards may be contributing to that because they rationalize some of their spending as OK since they will get the 1% rewards.  

Inactive or possibly New Users

 The other group of users are people who weren't previously  using a credit card before signing up for the rewards card.   That group didn't start with debts since they weren't using cards.   The report describes them as "inactive" users but that group would include any new consumers in general.   For the inactive group the average spending goes up $220 per month and the debt goes up $167 per month.  

My take on this is that these people are generally new card users who get lured into using a credit card by the promise of rewards.   They then typically end up in debt with the card.

People Like Me

The most interesting result of the study was for the card users who are like myself.  I use my rewards card for various purchases and then pay off the bill every month.   I don't carry any debt and I don't believe that the card "makes" me spend more than I would otherwise.

The study put people like me into the sub group they call "convenience users".   That would be the portion of people who do not carry debts and who were not previously inactive users.   For convenience users they found that :

"Those that do not carry debt do not increase their overall card balance as a result of participating in the cash back program." 
"The cash back impact on spending is not statistically significant for convenience users"

So what the study found was that people who pay their cards off every month and use reward cards do not end up with more spending nor more debt.    This is what I personally would have felt happens for people like myself.  

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