How Credit Card 'Cash Back' Awards Make You Poor

More

Credit card "cash back" awards sound too good to be true. So you're saying the more I charge to this card, the more money I earn?! Yes, that is what they are saying. And it ain't charity. Cash back benefits push consumers to spend more, accrue more debt, and owe more to credit cards, according to researchers at the Federal Reserve Bank of Chicago.

The initiation of a 1% cash rewards program yielded, on average, a $25 reward each month -- and an increase in spending by $68 a month and in credit-card debt of $115 a month, the economists say in a paper to be presented at the American Economic Association meetings next week. That debts grew faster than spending likely means people reduced their monthly payments more than they increased spending.

What's happening here? Just like the federal government tries to cut taxes to encourage new spending, these credit card companies are trying to make your purchases feel cheaper. So they're rebating a portion of each purchase to your account. That makes spending feel more affordable. So you do more of it. But too often the result is less money in your account, not more.

Quick note on public policy: The Making Work Pay tax credit in the Recovery Act tried to secretly rebate $400 to every individual so that we would look in our bank accounts, see the extra dough, smile, and ride that warm and fuzzy feeling all the way to the department store. The success of the "cash back" award in juicing spending suggests that it's better to be slick (The more you spend, the more you save!) than surreptitious.

Read the full story at WSJ.

Jump to comments
Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Get Today's Top Stories in Your Inbox (preview)

Sad Desk Lunch: Is This How You Want to Die?

How to avoid working through lunch, and diseases related to social isolation.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Where Time Comes From

The clocks that coordinate your cellphone, GPS, and more

Video

Computer Vision Syndrome and You

Save your eyes. Take breaks.

Video

What Happens in 60 Seconds

Quantifying human activity around the world

Writers

Up
Down

More in Business

Just In