Why do banks reward their customers to use their credit cards?

Sumit Agarwal, Sujit Chakravorti and Anna Lunn

No WP-2010-19, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: Using a unique administrative level dataset from a large and diverse U.S. financial institution, we test the impact of rewards on credit card spending and debt. Specifically, we study the impact of cash-back rewards on individuals before and during their enrollment in the program. We find that with an average cash-back reward of $25, spending and debt increases by $79 and $191 a month, respectively during the first quarter. Furthermore, we find that cardholders who do not use their card prior to the cash-back program increase their spending and debt more than cardholders with debt prior to the cash-back program. In addition, we find that 11 percent of cardholders that did not use their cards in the previous 3 months prior to the cash-back program spent at least $50 in the first month of the program. Finally, we find heterogeneous responses by demographic and credit constraint characteristics.

Keywords: Credit cards; Consumption (Economics) (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban and nep-cwa
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Citations: View citations in EconPapers (14)

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