Post-Bankruptcy Survival: Rewards Credit Cards Create More Debt

An example of street markets accepting credit ...

Post-bankruptcy debtors who sign up for credit cards which offer “rewards” such as cash back, may be at a higher risk for accumulating large amounts of debt. In a recent study which analyzed the spending habits of 12,000 credit card consumers, it was found that debtors who have rewards credit cards are likely to spend more and accrue more debt.

The initiation of a 1% cash rewards program yielded, on average, a $25 reward each month-and an increase in spending by $68 a month and in credit-card debt of $115 a month, the economists say in a paper to be presented at the American Economic Association meetings next week. ..In many cases, rewards entice people whose cards were dormant to start spending, the study found. About 11% of those who hadn’t use their credit cards in the previous three months made purchases of at least $50 in the first month of the program.

Debtors exiting bankruptcy need to understand that these rewards credit cards are working as they were designed. Credit card companies want consumers to spend more money, accrue more credit card debt and pay them more interest on their credit cards. Should post bankruptcy debtors avoid rewards credit cards? Ideally, post-bankruptcy debtors will use all credit cards sparingly. If they have another credit which they are using, they may want to transfer their spending to the rewards credit card so they can benefit from the cash back rewards while not increasing their spending. But if they do not have the discipline to avoid an increase in their spending on their rewards credit card, then they might want to avoid the rewards credit cards altogether.

By | 2017-12-13T02:17:37+00:00 January 17th, 2011|Credit and Bankruptcy|Comments Off on Post-Bankruptcy Survival: Rewards Credit Cards Create More Debt