Financial literacy and shrouded credit card rewards

Laura Ricaldi, Michael S. Finke, Sandra J. Huston

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


Credit card companies charge an interchange fee for each transaction, and almost half of this fee is returned to consumers in the form of a reward or perk program. Among credit card users who do not use cards for borrowing (convenience users), rewards are a means to negotiate the implicit price of the interchange fee. Any consumer whose time cost is less than the value of rebates should rationally choose a reward card. Half of convenience users do not own a reward card. We hypothesize that credit card companies segment customers by marketing non-salient credit card characteristics to appeal to naïve consumers while offering lower-price cards (net the rebate) to compete for more sophisticated consumers as suggested in Gabaix and Laibson (2006). Consumer sophistication is measured using a 20-question financial literacy instrument in a large national data set. When household characteristics such as education, income and wealth are controlled in a multivariate analysis, respondents in the highest financial literacy quintile were twice as likely to own a rewards card. The relation between literacy and reward cards provides evidence that credit card rebates resemble other markets where hidden product attributes create a welfare transfer from naïve to sophisticated consumers.

Original languageEnglish
Pages (from-to)177-187
Number of pages11
JournalJournal of Financial Services Marketing
Issue number3
StatePublished - Sep 2013


  • Credit card rewards
  • Financial literacy
  • Shrouded attributes


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