We've written a lot about the relative merits and drawbacks of reward credit cards. A new study from the Federal Reserve Bank of Chicago, though, adds an interesting new twist: Holders of cashback reward cards, it finds, are more willing to shoulder higher debt.
For a diligent consumer, reward cards have their place, especially when you earn cash back via a statement credit or a check. Credit card companies, after pulling back sharply a couple of years ago, are not competing aggressively once again to court attractive customers.For Americans still in a recessionary mindset, a cashback reward card seems like a good deal. However, there's also a significant downside to reward card use. For many of us, it's a trigger to spend more, and to carry more debt.
According to the Chicago Fed's research, holders of reward cards spend more on those cards. That's not a bad thing, in and of itself; it's certainly possible that cardholders are motivated by the prospect of earning rewards to shift more of their cash or debit spending onto the card. In other words, they're spending money they would have been spending anyway.
However, there's more to it than that: The agency also found that cardholders rack up more debt, too. According to the Chicago Fed's research, cashback cardholders earned an average reward of $25 a month. Sounds good, right? Not so fast. They also found that spending increases by $79 a month, and debt spikes by $191 per month for the first three months consumers have their cards.
"It's easy enough to lose sight of how much you're spending on a credit card when you're not going for a reward," Gerri Detweiler, personal finance expert for Credit.com, tells WalletPop. When the prospect of rewards comes into play, "There's an even greater tendency to spend more than you should," she says. "Psychologically, there's a justification that's going on in your mind."
To stay out of a rewards-induced debt trap, be conscious of how much you're spending. Ask yourself if you would be buying something if there wasn't a reward attached to the card, and remember: credit card companies make more money off your debt than they lose from giving you rewards. The best "reward" you can give yourself is avoiding debt in the first place.
Reward Credit Cards Tempt Users Into Greater Debt, Fed Study Says