$25 for $68? Seven Defensive Moves Against Credit Card Assault

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If I give you $25 today will you spend $68 more per month for the next three months?

Sumit Agarwal, Sujit Chakravorti, and Anna Lunn of the The Federal Reserve Bank of Chicago published research that shows how cash-back credit card offers cause card holders to spend more, reduce payments on other card debt and increase total card debt.

First, a little history.  According to the research:

  • Six billion credit card offers were mailed to consumers in 2005 with a 0.3% response rate.  The mailings are usually random to avoid trouble with bank regulators and discrimination claims.
  • In 1970, credit card related consumer debt totaled $2 billion as compared to $626 billion in 2000.

Americans need to armor-up to be victorious gladiators in the credit card and borrowing arena.

The researchers found that, on average, a cardholder who got $25 in cash-back rewards increased spending by $68 per month and their average debt went up by over $115 per month in the first quarter after reward program started.

Credit card users moved most of their spending to the reward card and decreased payments on the other cards in their wallet.  This is a financial rabbit trail that leads nowhere in the forest of debt.

If you had any doubt about the motives of credit card companies, the authors made the claim that the goal of the banks is to entice customers to spend more on their existing cards that could lead to a bigger carried balance and higher interest and fee income for the card issuer.  This is a prime example of potential borrower tipping by banks to increase profits.

The Chicago Fed research referenced a key research paper (Ausubel, 1991) which finds that consumers often ignore the interest rate on credit cards because when they make purchases they fully intend to pay back but change their mind when the bill comes.

The study sums up the profit motives of credit card companies with the finding that rewards are an effective tool to steal customers from a financial institution’s competitors.

Can that be good for the consumer?

How can you protect yourself from the allure of cash back cards?

Are banks and credit card companies acting unfairly by prying as much cash from your wallet as possible?  Join the discussion


About Michael Shelton

Your Business Coach Facilitating Delegation and Work Group Engagement Michael Shelton has over twenty-five years of business and military accomplishments, including extensive experience with one of the largest, publicly traded real estate investment trusts (REIT). He is a qualified business coach with assignments in cross-functional work group management, strategic planning, unit leadership, joint venture acquisitions, executive education, mentoring, training and merger integration. Michael has accumulated best practices for building committed work groups from more than $4 billion of capital markets transactions and commercial property development. He served as a commissioned officer and helicopter pilot in the U.S. Army, and earned his MBA from The University of Arizona. Michael has served as a major conference panelist and is the author of Cash Flow Rich, Winning Ways to Evaluate and Finance Real Estate. Today, he helps business owners get more work group engagement as President and CEO of Shelton Business Services, LLC in Scottsdale, Arizona. Disclaimer: I don't offer investment, legal or tax advice. Talk to your broker, accountant or lawyer for investment, tax and legal help. I might own stock in the companies I mention on-line. My posts, tweets and other on-line activity are my personal thoughts and don't represent my employer or company.
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1 Response to $25 for $68? Seven Defensive Moves Against Credit Card Assault

  1. Pingback: Bad Dog Debt: How to Avoid Selling Your Future Lassie Happiness | Pro Borrower

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