A basic lesson of economics is that incentives matter. Incentives can be positive or negative, and their effectiveness can vary, but everyone agrees that people are influenced by incentives.

Incentives don’t have to be purely financial. Sentences for various crimes vary depending on how strongly we want to discourage the crime. Possession of a drug like heroin carries a more serious penalty than for a drug like marijuana (if marijuana is even still illegal in your state). The idea is to create a stronger negative incentive to curtail heroin use.

Similarly, tax policy attempts to create incentives and disincentives. We discussed this in our post on the Basics of Taxes.

Financial Literacy and Incentives

Incentives are everywhere. Every retailer and manufacturer understands the basic economics of incentives, so they will use them to influence your behavior. When you see a coupon, a sale, discount or other offer, you’re being offered an incentive to buy. That doesn’t mean you should automatically decline—sometimes these incentives are valuable and you should take advantage of them.

Fees and fines are negative incentives. The idea is usually to discourage negative behavior. So a fee for making a late payment to your credit card balance is designed to give you an incentive to pay on time.

Unfortunately, we’ve seen some banks and creditors get this basic principle wrong. When the bank starts looking at the fees as a source of income rather than an incentive, they start creating situations where the fee will be charged so they can earn that money. But the point of the fee should never have been to make money—if all goes well, the bank will never collect any late fees because everyone will pay on time. A banker who doesn’t understand this might act in ways that are unfair to the consumer.

Say your payment is due on the 10th. That means you have to mail it in an the creditor must receive it before 5pm that day. But what if the creditor doesn’t send you your bill until the 5th? You barely have time to write the check and get it in the mail before you’re late. A creditor who does this is obviously just trying to generate a late fee, and they’re missing the point of the fee. For them it’s not an incentive, it’s a source of revenue.

Because of behavior like this, the Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act) requires creditors to send your bill at least 21 days prior to its due date.


Entrepreneurs create new businesses, to introduce new products, services, or to apply new business models to existing industries. Starting a new business is expensive and risky. The entrepreneur will likely have to take out large loans to start the business, and new businesses are prone to failure.
Why would anyone want to take such extreme risks? Their incentive is profit. Many people view profit as a dirty word. You might think we at credit.org would agree, since we are a nonprofit organization. But we understand profit is a powerful and necessary incentive to get new businesses started, create jobs, and develop new products and services for consumers. If there were no profit to be made from starting new businesses, then we would see less entrepreneurship and fewer jobs. And fewer new products, less innovation, etc.

Of course, profit isn’t the only incentive. Nonprofits like us work to help people regardless of their ability to pay. Any nonprofit or religious institution will have a mission statement that will indicate what drives them. But there is a financial component—our housing counseling services depend on grants from HUD to pay for our operations. Those grants are offered to ensure that housing counseling services will be available for consumers in need.

Raising a Money-Smart Child

In our Raising a Money-Smart Child materials and elsewhere, we’ve urged parents to consider putting their kids on an allowance. The idea is to teach them to handle money, to save, and to associate income with work.
But it may be best not to treat this allowance as an incentive.

Let’s say your child gets an allowance, and as part of the deal, they must take out the garbage. If you’re giving them a dollar to take out the garbage, you’re giving them an opportunity to pay a dollar to not do the job. For many kids, it may be worth a buck to avoid this chore! So when using an allowance and tying it to household chores, it should not be optional. The chore should be an expectation, not an option.

Another danger is that you could end up with a child who only works for a reward. It’s important that they understand there are things they must do regardless of the incentives offered.

There are other ways to use financial incentives with your kids. One suggestion we’ve made is to offer to match funds if the child makes a good purchase. So if the child has allowance money and wants to use it to purchase candy, you could offer to pay for half of the purchase if the child opts for a healthy snack instead. This way you’re not forcing the child to do anything—it’s still their choice—but their incentive is to buy something healthy and keep more of their allowance money.

It’s important that the reward incentives be consistent and predictable. Don’t resort to bribery to solve a problem on the spot. The rewards a child can earn should be spelled out well in advance, so they don’t learn to create a problem situation in order extract rewards from you.

Of course, negative incentives are a part of child rearing. Time outs for bad choices are an incentive to not behave badly. But we caution parents not to use chores as a punishment. Cleaning one’s room should be an expectation regardless of behavior. Don’t turn a regular activity into a negative.

Be on the lookout for incentives, and how you can employ them in your life. And remember just because you’re being offered an incentive, that doesn’t mean it’s a bad deal.

We’re standing by to help you with your debt or to master your budget. Call us any time to talk to a certified counselor for free credit counseling.

Speak to our certified Financial Coaches to review all of your options and discuss best strategies for getting out of debt.Speak to our certified Financial Coaches to review all of your options and discuss best strategies for getting out of debt.

About The Author

Melinda Opperman is an exceptional educator who lives and breathes the creation and implementation of innovative ways to motivate and educate community members and students about financial literacy. Melinda joined credit.org in 2003 and has over two decades of experience in the industry.