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Do credit card rewards make you spend more?

January 11, 2011

By Barbara Marquand | Money Rates Columnist

If you're thinking about signing up for a credit card to earn cash back- cash back credit cards, don't get so carried away by the rewards incentive that you forget to check the interest rate.

A newly revised study shows that the enticement to earn cash leads to increased spending and debt on credit cards.

Spending to earn

Federal Reserve Bank of Chicago researchers found that cardholders on average increased their spending by $68 per month and their debt by $115 per month in the first quarter after enrolling in a 1 percent cash-back rewards program offered by a major financial institution.

In their revised paper, "Why do Banks Reward their Customers to Use their Credit Cards?" released Dec. 20, researchers note the cash-back incentive was even more powerful for previously inactive cardholders. Those consumers increased their monthly spending by an average $220 and their monthly debt by an average $167 in the first quarter.

That doesn't mean the cardholders increased their overall household debt. Data from credit bureaus showed that the consumers' total of all their credit card balances remained level or slightly increased, indicating most merely shifted their spending from other credit cards to the one offering cash back.

"Our analysis suggests that in an extremely competitive credit card issuing market, rewards are another tool along with lower interest rates to steal customers from competitors," the researchers write.

So what does this mean for you? Consider the following tips for taking advantage of cash-back rewards:

  • Check the credit card interest rate

    It's OK to shift spending from one credit card to another, as long as you know what that move will cost you. Determine the interest rate on the rewards card if you plan to carry a larger balance. An increase in finance charges could wipe out any of the cash back if the rewards card has a higher interest rate than your other cards.

  • Watch your credit card spending.

    Keep track of your purchases to prevent the cash-back enticement from leading you to spend beyond your means. It's one thing to take advantage of a rewards program for items you planned to buy anyway. It's another to justify unneeded purchases because they'll increase your cash-back reward.

  • Pay your credit card bill on time.

    Under typical credit card agreements, you forfeit rewards if you pay your credit card bill late. Although they can't increase your interest rate on existing purchases unless you're 60 days late, credit card companies can dock your rewards points even if you're a day or two tardy.

  • Time your purchases to claim rolling rewards.

    Rolling rewards programs change every few months, offering extra cash-back on certain types of purchases. Read your top credit cards 2012 statements to understand how the programs work, and, if it makes sense for your budget, time planned purchases to maximize your rewards. You may need to sign up for the rolling credit card rewards programs for each period.

Remember that banks offer cash-back programs to encourage their customers to spend more. Don't let the credit card issuer benefit at your expense.

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