research
Why do banks reward their customers to use their credit cards?
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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,spendinganddebtincreasesby79 and 191amonth,respectivelyduringthefirstquarter.Furthermore,wefindthatcardholderswhodonotusetheircardpriortothecash−backprogramincreasetheirspendinganddebtmorethancardholderswithdebtpriortothecash−backprogram.Inaddition,wefindthat11percentofcardholdersthatdidnotusetheircardsintheprevious3monthspriortothecash−backprogramspentatleast50 in the first month of the program. Finally, we find heterogeneous responses by demographic and credit constraint characteristics.Credit cards ; Consumption (Economics)