Who Pays For Your Rewards? Redistribution in the Credit Card Market

Abstract

We quantify redistribution between consumers in financial markets comparing cards with and without rewards. Regardless of income, sophisticated individuals profit from reward cards at the expense of naive consumers. We exploit bank-initiated account limit increases to show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers repay credit cards following a sub-optimal balance-matching heuristic and incur higher costs. Banks incentivize the use of reward cards offering lower rates. We estimate an aggregate
annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.

Keywords: household finance; credit cards; financial sophistication; rewards

JEL Classification: D12, D14, G21, G40, G51, G53