Do credit card rewards make people spend more?
A study says yes, they do
Each card swipe promises to bring those coveted credit card rewards of free round-trip airplane tickets to a sunny beach paradise a little bit closer. And the more you swipe, the faster you can get there.
The allure of credit card rewards -- free airline miles, dining dollars or discounts at a favorite store -- encourage excess spending and thus contributes to the vast number of Americans laden with credit card debt, says a study published by a marketing specialist and an economist.
The presence of rewards make consumers more likely to use their card, even if they have an unpaid balance, according to the 2008 study released by Andrew Ching, an assistant professor of marketing at The University of Toronto, and Fumiko Hayashi, a senior economist at the Federal Reserve Bank of Kansas City. The solution? Stripping a card of incentives may curb the consumer's appetites to accumulate credit card debt in the quest for more rewards points.
Other data confirms that consumers take their rewards seriously. A 2008 survey from the financial and technological research firm Aite Group found consumers say that rewards are the second most important reason for choosing a particular card. Another 2008 study by marketing research firm ComScore indicated that two-thirds of customers would think about switching cards if one with better rewards were available.
Ching and Hayashi determined rewards are more profitable for credit companies to ensure continued credit card use. If all rewards were stripped, then most consumers would rely more heavily on debit cards. Removing enticing credit card and debit card deals would also contribute to a small percentage of customers abandoning plastic for paper methods of payment, such as cash or checks.
"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.
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