“Rewards” credit cards may reward banks more than you

A new study by three economists claims that people who got a “rewards credit card” that returned 1% of their expenditures in cash charged more and borrowed more. The study was based on the actions of 12,000 account holders at one financial institution.

The study
(which will be presented to the American Economic Association) showed that, on average, holders of this card got $25 a month in cash refunds.  But they increased their spending by $68 a month; and their loan balances rose by $115 a month.   Of course, the bank benefits when credit card customers charge more and borrow more.

Some of this extra spending was due to the fact that card holders moved spending from another card, but some of it was just an increase in spending and decrease in monthly payments.   Spending more is one thing, but increasing your debt is quite another.  Not good for your finances.  Beware of banks bearing gifts.

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