Credit cards offering customers cash back on purchases encourages spending more money that results in increased debt, according to research from the Federal Reserve Bank of Chicago.
On average, the 1 percent cash back program nets an average $25 every month, a $68 increase in spending and a $115 monthly increase in credit card debt, according to economists. Their findings will be presented next week at the American Economic Association meetings.
In 2005, bank and credit card companies sent about out an estimated six billion reward card offers, according to the economists at the Chicago Fed. For years, these companies have used a variety of tactics to entice customers to charge goods for rebates towards hotel rooms, airline miles and cash back.
The study found that even small rewards could prompt people to spend more money. Rewards often promoted people to use their cards for the first time in months. Roughly, 11 percent of people who had not used the card for three months used their cards to make a purchase of $50 or more in the month after the rewards program started.
For the study, the economists examined 12,000 credit card customer accounts at an unidentified financial institution over the course of two years. Some customers had cash-back rewards, which others did not.
Since debt grew faster among the customers with cash rewards, those people likely reduced their monthly payments rather than increased their spending.
The extra debt could mean people spent more money overall or became more inclined to use their rewards card rather than put the purchase on another credit card.