Cash-back reward programs on credit cards aren’t too good to be true—in truth, they can even hurt your credit score.
Debt Now, Cash Soon
A study run by three economists and mentioned in the Wall Street Journal found that among 12,000 credit card accounts, those users offered cash-back rewards not only spent more, but assumed more debt as well. From the Journal:
For a lot of people, the benefit of a cash-back reward is negated by increased overall spending and debt.
A Good Credit Score Is a Sad Thing to Waste
It’s no news that rewards programs are meant to inspire spending and funnel money to credit card companies, not simply to brighten our day. But the finding that really strikes us as problematic is a preceding statement: “That debts grew faster than spending among those offered cash rewards likely means people reduced their monthly payments more than they increased spending.” To minimize credit card payments in order to spend more overall is completely counterintuitive to financial health. Carrying a balance on your cards will chip away at your credit score, as will approaching your limit and accumulating credit card debt—the financial kiss of death.
Is a Good Score Its Own Reward?
In our minds, a great credit score that will facilitate home and auto loans and let us invest in our future easily trumps the occasional $50 cash back, especially if it’s “negated by increased overall spending and debt.” But we can understand the appeal of tangible rewards. When it comes to your own credit card spending habits, what do you do? Spend more with the aim of getting rewards, shift spending to a particular card in pursuit of rewards, or spend regardless of what comes?
Where Does the Recession Fit?
In the spirit of full disclosure, we should say that the accounts examined in the study were scrutinized over two years ending in 2002. Clearly, that was a different, pre-recession time with different, pre-recession habits. But once upon a time, it was clear that credit card rewards were inspiring debt among users. Could the recession have changed that?