When it comes to the American credit-card market, two things have been on the rise in recent years – the rewards cardholders are earning through using cards and the credit-card debt they’re racking up.
You’d be forgiven for wondering if it’s more than coincidence that the two trends are happening at the same time. Is the upward march in rewards creating a downward spiral of debt?
The evidence actually suggests that the proliferation of rewards isn’t causing people to increase their overall debt. Instead, consumers are shifting the way they pay for their purchases .
Credit Cards Capture More Commerce
There’s little dispute that Americans are turning to their cards more than ever. In 2016, so-called revolving debt, which is mostly run up through the use of credit cards, reached its highest peak in seven years.
However, history suggests consumers tend to favor certain forms of payment at particular times. For example, according to one study by TSYS, debit cards were the preferred method of payment for 48% of card-carrying consumers in 2013 , while credit cards trailed with a 33% preference. Fast forward to 2016, though, and the balance had shifted, with credit cards prevailing as the preferred form of payment. By all accounts, the trend has continued into this year.
Why the surge in popularity for credit cards? While a number of factors contribute, cards’ increasing rewards are likely a key reason. In an effort to make their card a ‘top-of-the-wallet’ choice, banks have made bonuses and cash back programs ever more lucrative. Business Insider estimates major U.S. credit card issuers have doubled their spending on incentive programs since 2010, upping the allure of using a credit card, even for transactions you might formerly have covered in cash or via a debit card.
Rewards Cause A Payment Shift, Rather Than An Increase
However, the evidence that card rewards actually induce people to spend more overall is elusive at best. A 2010 working paper from the Federal Reserve Bank of Chicago indeed found that consumers who receive a rewards card increase their spending to it. At the same time, though, the study found that consumers seem to offset that increased spending by lowering what they charge to their other, non-rewards cards. That means consumers are getting smarter. They would rather charge a purchase to a travel card that gets them some amount of cash back, rather than a card with no added incentives. Assuming the purchase is always paid off in full and on time, this is a smart financial move.