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
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.