A Theoretical Examination of Cash-Back Credit Cards and Their Effect on Consumer Spending
35 Pages Posted: 31 Mar 2020
Date Written: March 5, 2020
The role of cash-back credit cards in personal financial strategies is highly debated. For example, Dave Ramsey (Ramsey 2019) urges consumers to avoid even the most lucrative cash-back cards, while others argue that these cards offer significant savings. Herein, we construct models to analyze the use of cash-back cards by rational consumers, demonstrating that cash-back cards increase spending (and thus, reduce savings) for some consumers. While prior research focuses on behavioral issues related to credit cards, our research is the first to show that some consumers will rationally increase spending when using a cash-back credit card in lieu of cash.
Keywords: Credit Card, Personal Finance, Cash Back, Retirement Planning, Churning
JEL Classification: D11, D14, D15, G50
Suggested Citation: Suggested Citation