Cash-Back Credit Cards May Not Be All Reward

NEW YORK ( -- Last month it was holiday cards clogging your mailbox. Don't be surprised if credit card offers are replacing them.

January is the busiest month for credit card applications. Issuers will flood consumers with offers, especially for cash-back cards. Credit card issuers want your business, and they are competing for every customer, even trying to lure customers away from each other. Good deals are available, but it is important to compare offers to find the lowest rate and best rewards for you.

Credit card mailings are up significantly from last year. U.S. consumers got some 1.2 billion offers for credit cards in the third quarter of 2010, compared to just 391 million in the third quarter of 2009, according to Mintel Comperemedia. Eight in 10 offers are for rewards cards promoting points, miles or cash rebates, up from six in 10 offers in 2008.

Cash-back promotions on purchases have become increasingly popular as consumers save more and spend less. Cash-back credit card offers accounted for 41% of all rewards offers in the third quarter of 2010, compared to 28% a year before. Issuers responded to a new frugality by promoting rewards that offer better returns on "everyday items," with 45% of offers mentioning the word "groceries" somewhere in the promotional copy last year, Mintel says, up from just 20% in 2008.

Credit card issuers know rewards are an effective way to attract cardholders or increase usage. While these can be a nice bonus for people who pay off their balance and take advantage of the rewards, credit card companies use reward offers to increase spending that may just result in more cardholder debt.

A new paper by the Chicago Federal Reserve reveals why cash-back cards are important to credit card issuers: Consumers spend more and accumulate more debt with them. The study used a 1% cash-back card and found that the average cardholder got $25 per month in cash-back rewards using it. Average spending increased by $68 per month, though, and average debt by more than $115 per month in the first three months after the program started. Cardholders also reduced payments by $38 within those first three months.

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