I did some traveling over the holidays. Naturally, the minute I got back, I started thinking about my next vacation. Destination: anywhere warmer and sunnier than Chicago right now.

And like a lot of us, I wondered whether I could somehow game my credit-card rewards to snag a free trip.

But new research from Lulu Wang, an assistant professor of finance, shows that these kinds of credit-card perks are actually costing us all. This week, we’ll explain where all the freebies are coming from and why they aren’t actually free. We’ll also share some advice from Kellogg’s associate dean of digital innovation, Mohanbir Sawhney, on the art of accepting advice.

Not so rewarding?

Why is it that credit-card companies seem so eager to give certain customers airline miles and cash back?

Wang’s research shows that rewards are one of the best ways for credit-card companies to compete for customers. After all, as consumers, we have lots of choices about how to pay; rewards help companies achieve that coveted “top of wallet” status.

The difficulty, however, is that credit-card companies fund rewards through the fees they charge to merchants. And in the U.S., those fees have gotten very high: about 2.2 percent of the total transaction cost, on average.

Faced with higher fees, merchants can either raise prices, which affects customers directly. Or they simply eat the cost—which makes them more likely to struggle and close. “Consumers also take a hit from that, even if it isn’t in the prices of goods that they’re buying,” Wang says. “There’s one fewer coffee shop to go to or one fewer nice seller of clarinets.”

It’s also worth remembering that lots of Americans don’t have incomes or credit scores that provide access to the most desirable credit cards. This means that debit-card and cash users, who tend to be lower income, are essentially paying for the credit rewards enjoyed by wealthier Americans.

So, can the system be improved?

Wang’s study uses mathematical modeling to test several commonly proposed methods of doing just that. Capping merchant fees, as well as encouraging more debit-card usage, would be “the most robust policy,” he says.

Meanwhile, for consumers trying to decide how to feel about using rewards credit cards, Wang says there are no easy answers.

“The rational consumer response is, do whatever makes sense for your own financial health and get the rewards if you want,” he says. “The ethicist might say something like, would you be willing to put $100 in your pocket by stealing a penny from 10,000 people?”

You can read more about Wang’s research here.

Words of wisdom

Over on LinkedIn, Mohanbir Sawhney, who is also a clinical professor of marketing, had some great tips on receiving “the gift of advice.” (Psst, you can follow Kellogg Insight on LinkedIn, too. That’s my advice for today.)

Here are a few of his recommendations:

“Would you be open to changing your course of action based on the advice you might get? If the answer is a firm no, then don’t take advice! Readiness to embrace advice means taking advice with the intent to understand and possibly act upon it.

“Get enough advice so that you have a variety of perspectives and diversity of opinions, but not so much advice from so many people that you get confused and overwhelmed. More advice is not always better.

“After collecting advice, spend time to reflect. Synthesize the advice with your knowledge and values. Then, listen to your gut to decide the course of action. This will ensure that your actions combine the perspectives of advisors with your values and your goals.”

You can read the whole post here.

See you next week!

Susie Allen, senior research editor
Kellogg Insight