About 20 years ago a top economist told me that one reason the savings rate in the country was so low and that so many more people were going into credit card debt was because credit card companies had linked up with frequent flyer rewards program.
He pointed out how people were using the credit cards for everything, from buying groceries to cars to anything they possibly could just to get the miles. He mentioned how one man have even paid for his daughter's wedding using a credit card and then flew he and his wife to Hawaii on the points he earned.
Now comes a study conducted by researchers at the Federal Reserve Bank of Chicago that shows credit cards that give cash back or offer reward points prompt consumers to spend more and accrue more debt. They found that just the initiation of a 1% cash rewards program yielded, on average, a $25 reward each month for the credit card company. It determined there was an increase in spending by $68 a month and in credit-card debt of $115 a month.
Credit card companies have long enticed users with an array of rewards programs, from airplane miles to hotel rooms and cash back. The Chicago Fed economists say that in 2005, some six billion reward offers were mailed out by the industry.
Apparently, even small rewards can prompt people to spend more. The study found that in many cases, rewards entice people whose cards were dormant to start spending and about 11% of those who hadn't used their credit cards in the previous three months made purchases of at least $50 in the first month of the program.
The economists looked at 12,000 credit card accounts at a financial institution whose identity they don't disclose over a two-year period ended June 2002. Some of the customers were offered cash-back rewards; others weren't. They found that debts grew faster than spending among those offered cash rewards and that likely meant that people reduced their monthly payments more than they increased spending.
The extra debt could mean two things: People spent more overall or they shifted spending to their cash-back rewards card from some other card.