Description
Rewards have increasingly become a prevailing and effective way to attract new credit card users or stimulate spending by existing card users. Why do banks provide cash-back rewards to their credit card customers? How effective is the reward scheme in stimulating credit card spending? What is the impact of rewards on a credit card user’s debt accumulation? Using a proprietary data set from a major U.S. credit card company, this paper explores these questions by studying the impact of cash-back rewards on credit card users before and during their enrollment in the cash rewards scheme.We find evidence that credit card users increase their monthly spending by $70 during the first quarter after offered the rewards; however, their monthly debt increases disproportionally by $120. Monthly debt outweighing spending indicates that monthly payments drop more than the marginal growth in spending from cash-back rewards. Further evidence suggests that credit card users offset their growing spending and debt on the card with cash-back by reducing their spending and debt on their other credit cards.
Heterogeneity tests indicate that inactive card users (those who do not use their card prior to the cash-back program) increase their spending and debt more than card users with debt before the cash-back program. We also find heterogeneous responses of card users depending on their demographic and credit constraint characteristics.
Period | 13 Apr 2021 |
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Event title | ECON Brownbag Seminars |
Event type | Seminar |
Organiser | Department of Economics |
Location | Hong Kong, Hong KongShow on map |
Degree of Recognition | Institutional |