Why Do Banks Reward Their Customers to Use Their Credit Cards?
Georgetown University - Department of Finance
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