Are Credit Card Rewards Programs In Danger of Going Away?

After the passage and enactment of the Credit CARD Act, there was some concern over whether the new legislation would impact the ability or incentive of credit card issuers to offer attractive rewards programs. A new study performed by the Federal Reserve suggests that consumers should probably not have anything to fear on that front.

Using data from a large US financial institution, the study tested the impact of a 1% cash-back reward on individuals before and during their enrollment in the rewards program. Researchers found that consumers:

  • Increased their monthly spending by an average of $68 during the first quarter of enrollment, and by $76/month over the first 9 months
  • Paid off their balances more slowly, resulting in card debt increasing an average of $115 during the first quarter
  • Moved spending from their other credit cards to their new rewards card

Admittedly, the study was limited in scope, as it only examined data from a single domestic bank over the period of nine months. Still, it suggests that even a modest 1% reward is enough to significantly alter consumer behavior to the bank’s benefit.

Extrapolating further, it’s possible to see how even more generous rewards could theoretically still be financially viable. As long as there are consumers falling into this “rewards trap,” by increasing spending and debt in response to a rewards program, you can count on banks continuing to put out the bait. It would be wise to remember that cashback and rewards cards are only truly “good” if you pay off your balance every month.

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