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Why do banks reward their customers to use their credit cards?

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Author Info

  • Sumit Agarwal
  • Sujit Chakravorti
  • Anna Lunn

Abstract

Using a unique administrative level dataset from a large and diverse U.S. financial institution, we test the impact of rewards on credit card spending and debt. Specifically, we study the impact of cash-back rewards on individuals before and during their enrollment in the program. We find that with an average cash-back reward of $25, spending and debt increases by $79 and $191 a month, respectively during the first quarter. Furthermore, we find that cardholders who do not use their card prior to the cash-back program increase their spending and debt more than cardholders with debt prior to the cash-back program. In addition, we find that 11 percent of cardholders that did not use their cards in the previous 3 months prior to the cash-back program spent at least $50 in the first month of the program. Finally, we find heterogeneous responses by demographic and credit constraint characteristics.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2010-19.

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Date of creation: 2010
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Handle: RePEc:fip:fedhwp:wp-2010-19

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Related research

Keywords: Credit cards ; Consumption (Economics);

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The impact of credit card cash-backs
    by Economic Logician in Economic Logic on 2011-02-07 15:06:00
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Cited by:
  1. Wilko Bolt & Sujit Chakravorti, 2011. "Pricing in Retail Payment Systems: A Public Policy Perspective on Pricing of Payment Cards," DNB Working Papers 331, Netherlands Central Bank, Research Department.
  2. Scott Schuh & Oz Shy & Joanna Stavins & Robert Triest, 2011. "An economic analysis of the 2010 proposed settlement between the Department of Justice and credit card networks," Public Policy Discussion Paper 11-4, Federal Reserve Bank of Boston.
  3. Carlos Arango & Kim Huynh & Leonard Sabetti, 2011. "How Do You Pay? The Role of Incentives at the Point-of-Sale," Working Papers 11-23, Bank of Canada.

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  1. Economic Logic blog

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