Sitting on a mountain of debt? It might be time to cut up that rewards credit card, no matter how many air miles you're collecting.
If credit-card providers ditched the rewards programs, shoppers would be less likely to offer up their plastic at the register - a move that could help them lower their credit-card debt, a University of Toronto study has found.
The study analyzed data from 2006, collected by the American Bankers Association and Dove Consulting Group which tracked the payment methods and preferences of 1,979 shoppers.
If rewards programs were axed, indebted consumers would switch to other forms of payment such as cash or debit and perhaps even spend less, says Rotman School of Management professor Andrew Ching, who wrote the study with Fumiko Hayashi of the Federal Reserve Bank of Kansas City, Mo.
"People just have to be more careful to not depend [on]credit cards to earn some mileage points, they need to be aware of how much interest they're actually paying when they use the cards," he says.
Rewards, such as air miles, gas points and free groceries, are a huge incentive for people to use their credit cards even when they carry a balance, the study also revealed.
However, shoppers who regularly use credit cards and pay their bills would likely continue to use them if rewards programs were dropped since they're already comfortable with the payment method, he adds.
The Bank of Canada is currently looking into conducting a payment choice analysis similar to that of the American Bankers Association as Parliament mulls reforms on interchange fees, which merchants pay every time you present your rewards program plastic. To cope with these fees, merchants often raise store prices, causing even cash-paying customers to suffer the costs.
