On the surface, it would seem like credit card issuers are foolishly giving away money with cash-reward cards, and that a cardholder getting 1% or 2% back is reaping in easy money. The reality is much different. Simply put, the study says:
The main objective of the card companies is to increase card spending that may result in cardholder's debt in the future.
And based on the figures, the card companies achieve wild success in this objective. More spending. More debt. But hey, you get those occasional $50 cash-back checks in the mail! At least, that is, if you remember to keep track of your rewards and order the check—because these programs typically don't give you cash back automatically.
For the consumer, getting cash back is of course better than getting nothing—but only if you don't increase your overall spending due to the perverse incentives inherent in cash-back cards. Spending a dollar to get a penny back doesn't make sense.
But what if you were spending the dollar anyway? Then it seems silly to not get the penny-per-dollar reward. The problem is that it's all too easy for consumers to justify extra spending with credit cards. Studies show that you're likely to spend 12% to 18% more with a card compared to cash. And when you're vaguely aware that every item you pick up shopping gives you a little more cash back, well, then you're even more likely to place more stuff in your shopping cart.
Read more: http://money.blogs.time.com/2010/12/29/the-reward-for-cash-reward-credit-cards-higher-bills-more-debt/#ixzz19di5oNSR