Download this Paper Open PDF in Browser

Why Do Banks Reward Their Customers to Use Their Credit Cards?

54 Pages Posted: 3 Dec 2010 Last revised: 30 Dec 2010

Sumit Agarwal

Georgetown University - Department of Finance

Sujit Chakravorti

Independent

Anna Lunn

affiliation not provided to SSRN

Date Written: December 20, 2010

Abstract

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.

Keywords: Household Finance, Financial Incentives, Credit cards

JEL Classification: D1, D8, G2

Suggested Citation

Agarwal, Sumit and Chakravorti, Sujit and Lunn, Anna, Why Do Banks Reward Their Customers to Use Their Credit Cards? (December 20, 2010). FRB of Chicago Working Paper No. 2010-19. Available at SSRN: https://ssrn.com/abstract=1719054 or http://dx.doi.org/10.2139/ssrn.1719054

Sumit Agarwal

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)

HOME PAGE: http://www.ushakrisna.com

Sujit Chakravorti (Contact Author)

Independent ( email )

No Address Available

Anna Lunn

affiliation not provided to SSRN ( email )

Paper statistics

Downloads
641
Rank
33,600
Abstract Views
4,455