Why Do Banks Reward Their Customers to Use Their Credit Cards?
Department of Finance, Georgetown University
affiliation not provided to SSRN
December 20, 2010
FRB of Chicago Working Paper No. 2010-19
Using a unique administrative level dataset from a large and diverse U.S. financial institution, we test the impact of rewards on credit card spending and debt. Specifically, we study the impact of cash-back rewards on individuals before and during their enrollment in the program. We find that with an average cash-back reward of $25, spending and debt increases by $79 and $191 a month, respectively during the first quarter. Furthermore, we find that cardholders who do not use their card prior to the cash-back program increase their spending and debt more than cardholders with debt prior to the cash-back program. In addition, we find that 11 percent of cardholders that did not use their cards in the previous 3 months prior to the cash-back program spent at least $50 in the first month of the program. Finally, we find heterogeneous responses by demographic and credit constraint characteristics.
Number of Pages in PDF File: 54
Keywords: Household Finance, Financial Incentives, Credit cards
JEL Classification: D1, D8, G2
Date posted: December 3, 2010 ; Last revised: December 30, 2010
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