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

  • Sumit Agarwal
  • Sujit Chakravorti
  • Anna Lunn

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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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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