Do credit card rewards programs increase card debt?

Credit card rewards programs encourage spendingDisbanding credit card reward programs would likely cause a decrease in consumer debt, according to a study co-authored by a Rotman School of Management University of Toronto professor.

The rewards offered by credit card companies -- free airline miles, dining dollars or discounts at a favorite store -- often encourage excess spending and thus contribute to the vast number of Canadians laden with credit card debt, affirmed the 2008 study by Andrew Ching, an assistant professor of marketing at the Rotman School of Management and, Fumiko Hayashi, a senior economist at the Federal Reserve Bank of Kansas City.

In the quest to receive credit card bounty, consumers may satiate their appetite at the expense of their wallets. The presence of rewards makes people more likely to use their card, even if they have an unpaid balance, the report said. The solution to debt spurred by the promise of rewards? Strip the card of its incentives. This could help prevent the accumulation of credit card debt by consumers who lust after rewards points.

Terminating rewards programs may have a financial impact on credit card companies, which rely on the programs as a means of attracting customers and encouraging those they have to keep charging.

Ching and Hayashi determined that if all rewards on credit cards and debit cards were stripped, then most consumers would keep using the cards they already own. Yet they may use them differently. The number of credit card transactions is forecasted to slightly decrease while the reliance on debit cards would increase. The report revealed that rewards are more profitable for credit companies to ensure continued card use, yet aren't as impactful when considering debit card loyalty. Another side effect of removing enticing credit card and debit card deals would be a small percentage of customers abandoning plastic for paper methods of payment, like cash or check.

"Our results imply that removing rewards from all payment cards would also hurt card issuers who specialize in credit cards, but benefit those who specialize in debit cards," said Ching and Hayashi in the conclusion of their study.

Published August 3, 2009

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