The risk of credit card rewards programs

by | Jun 3, 2017 | Bankruptcy

The growth in credit card debt at its peak since the Great Recession of 2008 has created a burgeoning cottage industry: rewards programs attached to the accounts. The promise of earning money or travel points from purchases is difficult for consumers to resist.

“What’s in your wallet” may be paying off dividends now, but the debt associated with it could lead to problems in the future.

The proliferation of these programs has played a key role in credit card debts’ return to prominence. Using revolving debt for major purchases is enough of an incentive to choose a credit card with rewards. The allure of earning a small percentage from the transaction may be fueling credit card debt’s comeback to its highest peak in seven years.

In 2013, 48% of consumers preferred debit cards for payments with 33% choosing credit cards. Three years later, credit cards have pulled ahead in the race for customers in a study conducted by TSYS.

Banks continue to provide more lucrative bonuses and cash back programs than ever before. According to Business Insider, domestic credit card issuers have doubled their spending incentive-based cards since 2010.

A 2010 working paper from the Federal Reserve Bank of Chicago reveals a particularly interesting dynamic. Consumers with both types of cards are more likely to put purchases on the rewards card, yet offset the potential “savings” by not paying off balances in full.

Not following that “golden rule” negates the value of points and percentages, even if it involves significant emergency expenses. Continually growing debts could present more risk than reward.