Are customers led to spend more with rewards credit cards?

[Wednesday, April 6th, 2011]

Rewards credit cards for a very valid reason are amongst the most popular credit cards. In fact, rewards such as 1% cash back could lead to a substantial saving over a period of 1 year or more. However, according to some recent analysis, customers don’t always gain by enrolling for rewards credit card programs. This is because there is a significant increase in spending in a lot of cases, and customers shift more towards using their rewards card. This results to increased balances on the rewards cards of the customers over a period of time.

Focussing on the expenditure patterns of various cardholders, reveal that those who had enrolled for cash back programs that offered 1% discount or cash back on all purchases showed some interesting results. In fact, it was found that after enrolling for such reward programs, the cardholders increased the money they spent by about 68 dollars in a month for the first 3 months and by 76 dollars in the first 9 months. The worrying factor is that not only spending but also the outstanding balance on the credit cards increased significantly. The increase in debt was about 115 dollars every month in the first 3months of the program and about 197 dollars in the first 9 months.

Although part of the reason was that cardholders had shifted all their expenses to the reward card, the data still suggests that the total outstanding balance went up by at least 40 dollars and 66 dollars in the first 3 and 9 months respectively. Interestingly, the effects of the cash back rewards varied between 2 types of credit card users. There are 2 different types of card customers, those that pay the entire outstanding balance in full every month and the other who pay over the longer term. Interestingly those who repay the balances in full ended up spending about 138 dollars per month more compared to just 47 dollars for those who regularly carried debt on their cards. The biggest change though was seen in case of card holders who hadn’t used their credit card for at least 3 months before signing up for the new credit card. The average increase of about 220 dollars per month in the first 3 months was quite high. The balances too went up.

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