11/22/2011

Holiday Credit Card Spending: “Deal” or “No Deal”

Do holiday credit card bonuses or cash back rewards out way the negative consequences? Credit card companies are offering unusual rewards for making purchases at specific stores this holiday season. According to a recent article from USA Today, American Express, among others, is offering five times the amount of reward points when their card is used on purchases at certain chain stores.

There is no question that five times the reward points is a huge bonus for those who do or want to collect reward points. Credit card holders who change their shopping habits just to receive the bonus rewards, as the credit card companies hope, may believe they are getting the better end of the deal. However, consumers need to read the “fine print” as they may not receive what they think they will receive.

The most important factor for a consumer to consider when using a “bonus” credit card is the ability to pay off the bill in full at the end of the month. Not paying the full amount due negates the rewards, according to the article mentioned above. Credit cards give purchasers an immediate satisfaction, but that satisfaction is gone when the bill comes and they are not able to pay the bill in full. Credit card companies design such campaigns for their chain store clients, realizing that they will not have to pay up most of the bonuses offered. According to an Excel file from BBA, 67.4% of credit card balances were bearing interest in February 2011. This is mostly carry-over spending from the holidays.

So the question is…are holiday deals purchased with credit cards really worth it? The answer will boil down to the ability of the credit card purchaser being able to pay off their bill in full when the next billing cycle comes around.

9 comments:

Dr. Tufte said...

-1 on Belba for a spelling error.

This all boils down to demand elasticity. If a credit card user has inelastic demand, the enticements won't work well.

But, flipping that around, the fact that the enticements are popular suggests that many people in fact have elastic demands. For some products, you have to wonder why that is though.

Dr. Tufte said...

P.S. After commenting I remembered that The Simpsons have touched on this topic: Marge buys water heaters she doesn't need because they are on sale.

That's a comical example, but we've all thrown out items we bought in bulk from Costco. I'm not sure what makes our demands elastic, but I do know that in many cases we'd be better off if they weren't.

Aaron said...

Interesting. This post caught my attention, perhaps now, more so than it would have before last week. Admittedly, I was one of the countless Black Friday shoppers but I didn't charge a dime to a credit card because I don't carry one. Your post prompted me to Google search "current US credit card debt" and I was led to a fun article on www.creditcards.com authored by Ben Woolsey and Matt Schulz. The article shares a number of statistics about credit cards, who uses them, and possible trends among users.

I've studied Geert Hofstede's cultural dimensions in the past and the trends associated with US credit card debt are consistent with Hofstede's studies wherein the United States, as a country, tends to seek instant gratification; that is, we have a weak long-term orientation. We live in a time where one can get almost anything "on demand". And, so long as credit cards are available, purchasing whenever and wherever even if we don't have the money will always be a possibility.

P.S. I'm not a big fan of credit card debt.

Dr. Tufte said...

In economics, we'd make a distinction between Aaron's and Belba's positions.

Aaron is taking a normative position: how should we behave.

Belba is taking a positive position: how will promotions affect the facts of credit card use.

Neither is right or wrong, but there often isn't much intersection between the two perspectives.

Mitchell Stone said...

This reminds of a comedian who joked about buying a really expensive sports car, returning home to his wife and telling her he save over $1 million dollars because he was going to buy an airplane instead. I too participated in Black Friday, but like Aaron, did not purchase anything on credit. It was incredible to see how rude some people were. I agree with the findings of Geert Hofstede, we are a society trained to seek instant gratification. We tend to look at the immediate and short-term consequences rather than the long-term effects of our decisions.

Cameron said...

I agree with opinion shared by both Aaron and Mitchell in that I rarely use my credit card or carry a balance. The promotions must however work because the credit card companies continue to offer them at an ever increasing rate.

I read an interesting article written by Jim Sloan from www.foxbusiness.com explaining that one possible reason that banks are offering larger than normal credit card promotions is that they are trying to compensate for lost debit card revenue from recent federal regulations. The article also noted that, "Consumers had been reducing the amount they spend and owe on their credit cards since 2007, but that trend has stalled in recent months as credit card spending has began to move upward again". (Sloan 2011)
Whatever the reason, the promotions must be having an effect.

Windwalker said...

Dr. Tufte shared the example of throwing items purchased at Costco in bulk away, this is done daily across America. We are weak, used to being able to have things when we wanted them. Our parents and grandparents did not do this, mostly, but that is because the resources were not available to them. how often has your spouse come home to tell you of the wonderful deal she got on these shoes or on this or that. Great, but did she really need them in the first place. I also get a kick out of someone who says, "oh just buy it, you can write it off." I could do that, and pay the interest, etc, but since I dont really need it, I would rather just have the cash. Point being, credit cards are great assets to have, when needed, but should never be used for items just becuase they are on sale or because we may need a write-off.

Dr. Tufte said...

-1 on Windwalker for a spelling error. I did not take a point off Cameron for the lack of a link because the comment would have been (not as good but still) OK without that cite.

Windwalker: we're not weak. We're rich. Phenomenally richer in income, wealth, options and time. The problem is not that rich people throw things away they don't need, or buy things they won't use. Rather, the problem is that they lie to themselves and others that they aren't squandering their riches.

There's a good name for this that is not in wide use: surplus dissipation. It is the personal and household equivalent of the lazy monopoly problem: when faced with a surplus, we redefine wants as needs until the surplus is gone. The only that household do that firms don't, is bitching about how poor they are after they've done that.

None of this is weakness in the moral sense that Windwalker is steering towards.

Dr. Tufte said...

After writing this, I went and graded some of the Discussions in Canvas.* In reading some of the answers in a questions about price discrimination and consumer surplus, I hit upon a useful addition to this question.

I think part of the richness of modern life is the amount of consumer surplus we get from our modern conveniences. But, here's the thing: we mostly choose not to enjoy that consumer surplus as cash in the pocket for later purchases, but as additional purchases today.

For example, which happened to you more recently: you walked out of the store with money left over because what you wanted was on sale, or you walked out of the store with more stuff than you intended because everything was cheaper than you'd planned?

The end result is that most of the consumer surplus of modern life is clogging up our closets, basements, and garages (or all three).

It seems to me that the credit card enticements work, in part, because they appeal to how we want to receive our surplus.

* Sorry outside readers, this is in the private part of the class).