Why Do Banks Reward Their Customers to Use Their Credit Cards? (Agarwal S., Chakravorti S., Lunn A.)

Bank-Borrower Relationships Credit Cards Household Strategies

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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Libref/ Agarwal S., Chakravorti S., Lunn A. (2010) "Why Do Banks Reward Their Customers to Use Their Credit Cards?", FRB of Chicago Working Paper No. 2010-19, pp. 1 - 54
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