Do Credit Cards Take from the Poor and Give to the Rich?
Published on - August 6th, 2010 (Modified on - August 8th, 2011) (by J.D. Roth) My philosophy on credit cards has changed completely in the last five years. I’ve gone from anti-credit-card to pro-credit-card — but only for those who can use them responsibly. I think they’re a great convenience, and I like getting cash back when I use mine.
But not everyone thinks this cash-back feature is a good thing. In fact, my inbox is a-flutter with folks who want me to comment on the recent credit-card study from the Consumer Payments Research Center. This study (which can be downloaded as a 810kb PDF from the Federal Reserve Bank of Boston) found that credit cards transfer wealth from the poor to the rich. How? Through fees and rewards programs.
From the abstract:
Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year.
Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.
To summarize: Wealthy people are more likely to use credit cards than poor people (and more likely to receive rewards for doing so). But because prices are generally the same whether you pay with cash or credit — in most cases, credit-card companies prohibit stores from adding a fee for credit-card use — poor people usually pay more for things than wealthy people do. This is, effectively, a transfer of wealth from the poor to the rich. This isn’t just hypothetical or abstract; the paper lays out the details for just how this occurs.
There’s a lot of interesting information in this study, and if you have time, you ought to read it. It’s thought-provoking. And it has created quite a stir in the media.
- Even before this study was released, Ron Lieber at The New York Times was contemplating the damage of rewards cards. Lieber has been “fanatical” about using his mileage card for fifteen years, but recognizes that he may be part of the problem. Since the release of the study, the NYT Bucks blog has posted a follow-up about how much credit card rewards cost the poor.
- The Wall Street Journal blog post on the study offers no opinions, but the commenters make some interesting points. (Well, those that aren’t being internet idiots, that is.) I particularly like the comment from Jay on July 27th at 10:48am (which describes the reasons low-income earners shouldn’t use credit cards).
- GRS reader Alan forwarded this article from the Portland Oregonian, in which Brent Hunsberger does a good of explaining the complicated web of fees and payments in the current system. (And the comments on his article are surprisingly rational; OregonLive.com is not known for its intelligent discussions.)
The article from the Oregonian also includes this video, in which Hunsberger diagrams the web of credit-card fees and payments:
Out of curiosity, I pinged my pals at Index Credit Cards. Their new spokeswoman, Dr. Mary Ann Campbell, had this to say:
The problem, as I see it, is that there aren’t enough options to incentivize the poor, such as discounts for cash or no-fee cards with low limits and strict rules to help them build their credit. Increased options and incentives for the poor without taking away the reward for good behavior earned by people who are managing their money well would be a smart and healthy way to address this dilemma.
It’s all about incentives and options. The incentive of credit card companies to get people who have the money to spend more is working through reward cards. As the economy is driven through more spending, so are more jobs created, and tax revenues increased, which I see as actually helping the poor.
So, what do you think of this research? I understand the research and accept that it’s true, yet it’s unlikely to change the way I use credit cards. Yes, I could take a moral stand and refuse to use credit for most of my purchases. But doing so would cost me a lot of money — roughly the same as my dining-out budget for a few months. (And I like my clams in butter sauce!)
The main problem is that the system already exists, and it’s deeply entrenched. It’s not going away. By electing to opt out, smart consumers — wealthy or not — cost themselves money. If using a rewards credit card without carrying a balance is a way for me to save a few hundred dollars a year, that qualifies as one of those Big Wins I’m always preaching about. It seems foolish to give this up.
But maybe I’m just being selfish.
What about you? Does this study make you think twice about your own use of credit cards?
GRS is committed to helping our readers save and achieve your financial goals.Savings interest rates may be low, but that’s all the more reason to shop for the best rate.Find the highest savings interest rate from Ally Bank, Capital One 360, Everbank, and more.
This article is about Credit Cards, Economics, News
Disclaimer: This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.
Discover is a paid advertiser of this site. Reasonable efforts are made to maintain accurate information. See the Discover online credit card application for full terms and conditions on offers and rewards.
SEARCH FOR RECENT ARTICLES
I agree – if I stopped using my rewards credit card as a matter of principle, how would it help the poor? On the other hand, I have considered dropping it just because of the horror stories I keep reading about the way the major banks treat some of their customers – it makes me tempted to just get a credit card from my credit union and forgo the rewards (the credit union doesn’t offer a rewards card). But I haven’t personally had any problems with the two major credit card issuers that I currently deal with, so for now I am sticking with it.
loading....
We use our credit cards for miles and pay them off every month. Some gas stations have started giving “discounts for cash” which seems to be a semantic way around up-charging for using a CC. If other vendors started doing the same, it would be a reason for us to reconsider using credit cards.
loading....
I certainly believe responsible individuals should be rewarded for their discretion and strong management of their credit and money. Cash back and rewards cards are fantastic inventions when used correctly. The ones benefitting from this program are generally wealthy because they are responsible (not in all cases of course and there are certainly poor people who are responsible). What needs to change is for the young and poor to be given a chance to build credit so they can obtain these same opportunities. Our lending system has become a vicious and detrimental cycle where one needs good credit to obtain credit, thereby denying the opportunity for those with no credit history to build one and those with poor credit history to recover. With a better system in place, I think it would be perfectly fine to have a structure where the responsible ones are rewarded at the expense of the irresponsible. That provides an incentive to become responsible and punishes those who fail to “get it”.
loading....
I’ve used a reward card for the past few years. I’m not going to change my credit habits as a way to ‘take a stand’. Every month, I pay off the card- I use the card for groceries, mainly, plus things I occasionally buy for myself out of my fun money. It took work for me to get to the point where I don’t carry a balance month to month, you know? That reward money paid for things for which I’ve been saving. I like Dr Campbell’s suggestion for low limit credit cards with rewards for people with lower incomes and bad credit.
loading....
About your last comment: One of the major problems I see about this transfer is that the decision to opt out can only be made by the receiving end. The people using cash simply do not have the power of deciding to opt out. Since most rich folks (or rather people with financial skills) will not have an interest in giving up the extra earnings.
loading....
Wow. I’m something of an anti-credit card crusader, but I’d never actually thought about rewards cards in those terms. It really is another tax on the poor, when push comes to shove.
And my paying cash for everything is obviously costing me money in ways I’d never considered. Very interesting.
I write for an audience made up primarily of young finance professionals (or college students studying to be finance professionals), and their generation is a MESS from a personal finance standpoint. Runaway debt, egregious unemployment, and very little practical education when it comes to money all contribute to a bit of a “lost generation”. I habitually caution them against credit card usage.
J.D., what advice would you give people that age (18-25) about using rewards cards? Is the temptation to overspend outweighed by the potential savings? I realize it’s an individual phenomenon, but if you had to give general advice in this case, what would it be?
loading....
I was thinking along the same lines as John…if I stop using my cards, it’s not going to effect much change. It’s not like the credit card companies will then reduce the fees they charge to merchants and the merchants will then lower prices. Companies are typically quick to raise fees and VERY slow to reduce them even if circumstances change for the better.
I think I can do more good for the poor by employing other means (i.e. helping them directly).
loading....
We use our credit cards for almost everything. I hate using cash because I always forget how I spent it or where it went. With the cards I at least know where I spent the money, even if I cannot specifically remember on what. And getting cash back is a nice bonus. So no this won’t be changing my usage.
As a side note, I wonder how many people actually know that the merchant is the one paying for their cash back? I didn’t know that until I worked for a company that accepted credit cards and was responsible for reconciling the deposits each day.
loading....
I don’t know why this study characterizes the wealth transfer as being from the rich to the poor. In fact, the transfer is from people who don’t use reward cards to those who do.
loading....
What many people don’t realize is that merchants pay the fee as a percentage of the total cost, not the purchase price. Here in Canada, that means there’s a fee on top of the HST (which can be up to 15%, depending on the province) and any fees like Ontario’s eco fee on electronics and other goods.
I’ve always wondered if people who can’t manage credit card debt realize how much interest they are paying on taxes.
loading....
It seems to me that people do well with credit cards, or do badly with credit cards, because of the way they handle money. If they’re not financially sensible, then people will get into a mess one way or another. But that’s their own fault. If they’re old enough to get a credit card, then they’re old enough to get a handle on their spending and learn how to use their money. If someone gets into a mess with a credit card because of an emergency, it’s their own fault for not taking time to work out what is the best option for them.
loading....
We used our Schwab 2% back credit card almost exclusively for a year and made several hundred dollars from cash back, which was nice. However, we found that, even with the best intentions, we spent more when we were using the credit card than we do now that we just use our debit card, canceling out the cash back rewards (and then some).
loading....
I love my cash reward credit card. I pay it off every month, and there is no way I would stop using it to take a stand.
If people feel that strongly about this benefit for the ‘rich’ then they can always donate their reward to a worthy cause (I know you can donate miles, and obviously cash.) I think that would be a better way to make a point, because I doubt the system is going to change.
loading....
I haven’t read the entire study yet and my understanding of statistics is fairly poor. But being the skeptical and somewhat cyniacal person I am, what’s to say that the people who ran the study didn’t formulate the answer they wanted and created a study to match. Or, like so many have done with the infamous Dun & Bradstreet study, have the people who have written articles on this study drawn conclusions based on what they wanted to find?
This is in no way, shape, or form an attack on your character or your journalistic integrity JD. I have generally found that you seem to put a lot of effort into what you write in terms of researching and formulating opinions with appropriate research to back up your claims. However, as I’ve taken more interest in the news and the sources that I get my news from, I find myself somewhat appalled at the lack of substantial evidence for the claims made by even so called “credible” news sources.
When I say that I have a poor understanding of statistics I mean that I have not progressed further than an introduction to the field and how it relates to my field of study, engineering. I understand that there are mathematical ways to determine the appropriate sample size and mix to assure a random sample of society that reasonably reflects society as a whole within a certain margin for error. I understand, as well, that statistics can be used to show whatever you want them to if you ask the question the right way, so that the same statisic can be presented in multiple formats to assure the appropriate conclusion is made depending on the author’s context. For example: Only 25% of people surveyed chose Brand A over Brand B. Or 1 in 4 recommend Brand A over Brand B. Depending on context, different impressions are made to suit the author’s arguement.
Humbly then, my question for you is why do you accept the study as a true representation of reality? What makes you conclude that credit cards rob from the poor to pay the rich and that they don’t just rob from everyone equally for example?
Thanks for continuing to bring relevant issues to this blog. You’re right: this is definitely thought provoking!
loading....
I disagree that the rewards system is the problem. The entire credit card system (which is a convenience to everyone, poor or rich) has been set up so that a lot more money is being made by the credit card companies than they will ever give out in rewards. Those front-end and back-end fees would not go away even if all reward cards were taken away and replaced with a regular card or a debit card.
We have come to consider using a debit card as the same as using cash, but in order to use that card there must be the credit system in place to physically use it at the store.
While it may not seem fair to charge everyone the same for different forms of payment, it really is because in the end the merchant is the one who has to pay to keep up the credit card system. The only way around it is if EVERYONE stopped using every type of plastic, and I don’t see that happening. Plus, once cards went away, how likely would merchants be to lower prices? Not very.
If the rewards are encouraging people to spend instead of save it does boost the short-term economy, so I see nothing wrong with it. I do agree that there needs to be a better way for people to raise their credit scores to qualify for the rewards part of this system.
loading....
The study does not make me think twice about using my credit card for all purchases. I pay it off every month, and get a pretty nice reward for using it. Why wouldn’t I?
There will always be poor people in the world. By earning a thousand or two thousand dollars a year in rewards, I can afford to donate more money to charity. In fact, I’ll make that donation using my credit card! I see it as a win-win for everybody.
loading....
It’s a stretch to call that stealing. Everyone has the ability to succeed or fail. If people fail to take advantage of rewards points, those of us who do get them aren’t stealing anything. If credit cards were exclusive and difficult for the poor to get, then this argument would have some weight. But that is FAR from the case.
loading....
JD, the link to the study is incorrect – your home url has been inserted in front of the actual url.
loading....
I don’t use credit cards in my day to day life. I do have a card but only use it for travel or for business expenses. Credit card costs, including the high end rewards cards, don’t just cost the poor, they cost everyone. Prices on almost all goods and services are higher to account for credit card interchange fees.
So the solution in my mind is to charge people who use credit cards more, like they do in Australia, and have the interchange fee tagged onto the purchase. Or to provide discounts to those who use cash or debit.
Rewards cards do cost the merchants more, the merchants pass those costs on to all of us and therefore rewards cards do cost all consumers more.
Non-rewards cards and debit cards also incur fees to the merchant but the fees are much less.
loading....
Is it more rich v. poor or smart with money and bad with money?
I understand that there is some correlation there, but even fairly well off people can be stupid and carry a balance. While at the same time relatively poor people can maximize the amount of rewards points/money they get while paying no interest.
I’ve had friends who realized they were very bad with credit cards and cut themselves off going cash only for years before they felt comfortable enough to return to credit cards. At the same time their well-off parents were willing to bail them out.
loading....
@Money Smarts Blog:
“I don’t know why this study characterizes the wealth transfer as being from the rich to the poor.”
This question was directly answered in the study abstract, quoted in the blog post:
“Because credit card spending and rewards are positively correlated with household income.”
Maybe read a little more closely next time?
loading....
Poor people with good credit scores can get a rewards credit card, and if they put everything they purchase on it while paying it off each month, they too would get free rewards. If poor people are irresponsible and spend outside their means, and therefore must only use cash or have lower credit scores from missed payments/high utilization, then, that is not my fault and why should I stop using my rewards cards, that I have had for years, including those years that I was a student and making below the poverty line?
Rewards are there to encourage people to use their credit cards. Credit card companies must make a profit, or they will no longer offer ANY credit cards. ALL credit cards have transaction fees. Why not use a rewards card then? It’s not like if we all switched to no-rewards, the transaction fees would go away. It’s just more sensationalist to blame the rewards.
Also, the average “wealthy” person donates more that $23 a year to charity. The average American does.
loading....
Gee, imagine that? The rich getting richer on the backs of the poor. Now it’s through CC use. Us white devil slavemasters have concocted yet another scheme to rob the poor.
CC are a tool and just like a knife, they can either stab you or (in the hands of a skilled surgeon) save your life. I have watched the CC-are-evil Ramsey/Orman diatribes for a while now and they leave one important part out: Personal responsibility. If you are financially responsible and use a card judiciously, it is a great tool. Using somebody else’s money for a month for free is simply GREAT.
But if you are an impulse spender who uses shopping as a therapy to assuage other personal problems in your life, they are the vehicle which will drive you off the cliff.
Yup. If you have time to buy, shop wisely, carefully consider each and every expenditure of size (you have to determine the threshold), you already are halfway there to responsible financial management.
No, this study does not make me think twice about using CCs. I have ONE; I use it for just about everything and more importantly, I don’t buy stuff I can’t afford (I make myself think I can’t afford many things) and I pay it off every month in full. But I sure DO want the bonus points/dollars/miles or whatever program you deem valuable to you.
Oh, I am at a point in my life now where I really can buy most any commodity I desire (and pay cash), but I don’t. I buy what I need and for the superfluities of life, I pause. I ask myself 1 question: “How will I feel about this purchase in a day, a week and in a month?”
If I can satisfy myself that I will still use it and feel good about it later, then I move to phase two: Determining best brand/best bang for the buck and where to get it. Time is your ally here because the ability to walk is also the ability to negotiate, and inevitably that helps the buyer, not the seller.
I do take offense at the insinuation that wise and careful people are somehow exploiting poor people by using a CC. The opportunity is there for all; with half a brain and motivation anybody who desires financial freedom can attain it (and have a CC too).
Bottom line: Live below your means and you will be ok. The wider the gap, the faster you can retire.
-cc
loading....
@Vikas:
“Is it more rich v. poor or smart with money and bad with money? I understand that there is some correlation there, but even fairly well off people can be stupid and carry a balance.”
I’m surprised so many commenters here are failing to grasp the correlation. In general, income level correlates with skill with money. The fact that you know some rich people who are poor with money does not invalidate the correlation. That’s simply an outlier.
In general, fat people have worse eating habits than thin people. Of course, there are some obese vegans, and some skinny people who are bulemic, but in general, if you see a fat person, you can bet their eating habits are poor. Obese people are more likely to have diabetes. So your question is analogous to asking:
“Is the diabetes link fat vs. thin, or good with food vs bad with food?” It’s a moot question, because in general, poor eating/money habits are correlated to being overweight/poor.
loading....
Hm, I don’t think I shop at the same stores as the poor. That sounds horrible and elitist, but it is true. I live in an upper middle class neighborhood with mcmansion neighborhoods on the outskirts and all the close stores are geared at that. The rest of our shopping is done on the internet or at specialty stores/restaurants in the nearby city. We don’t buy much, but what we do buy is high quality.
Even if we did shop in the same stores, I would still use the credit card. I guess I’m evil that way. Well, in reality I just don’t think my one little credit card use has that big an effect. Maybe I should donate more to the food pantry in penance.
As an earlier poster noted, a way to solve this would be to encourage the use of “discounts for cash,” which I do see primarily at gas stations and discount stores.
loading....
@Kevin – “positively correlated” does not mean that every single “rich” person is getting a wealth transfer from some “poor” people.
I certainly accept the basic premise of the study, which is that people who don’t use reward cards (or don’t use the rewards) subsidize the rewards for those people who do use rewards cards and claim rewards. In fact, I would say this is pretty obvious.
My two points are that:
1) It’s not universally true – not every rich person has a rewards card and not every poor person doesn’t have one.
2) According to table 7 in the report – the net benefit transfers start at the $50,000 income level. I don’t know at what income level you become “rich”, but $50k or $100k surely isn’t it.
loading....
I think that the most logical way to “Take A Stand” would be to request a discount for using cash at merchants —
If the merchant agrees, let them know you appreciate them and frequent their store. You may not get your reward, but you just saved up front. If the merchant does not agree — you can still use your CC but see if you can take your business elsewhere in the future, and maybe gently help the store understand why you are doing this.
I think this would mostly work almost exclusively for local merchants, as I don’t see major nationwide chains authorizing 2% discounts – but it would be worth a try; and frequenting local shops is probably a good thing to do regardless.
loading....
I haven’t read through all the comments, so please forgive me if someone has already said this.
Rewards cards aren’t actually rewards. Credit card companies charge merchants to allow them to accept credit cards. But it isn’t a flat ‘all credit card transactions cost $X.’ Rewards cards cost the most. So in return, merchants have to build those fees back into their prices. You aren’t actually saving really anything by using a rewards card. The money was yours to begin with, and now the store is charging you more to use a card thats simply going to give you some of that money back. I have never understood why people like rewards cards so much. We all know credit card companies aren’t in the business of giving you something for nothing. That money comes from somewhere, and in this case, partially your own wallet.
loading....
This absolutely makes me think twice – it makes me want to pay off my credit card, so that I can use it for every purchase I make and pay it off at the end of the month.
This isn’t about rich or poor, but about good vs. bad with money. Poor people can take advantage of this knowledge just as much as rich people – they just need to have the information and make the smarter choice.
loading....
@Kevin,
I don’t think your analogy is very good. From what I’ve seen in my life, how rich you are and how responsible you are with money are almost entirely unrelated. If you’re making $100,000 a year, but spending $110,000 per year, you’re rich (for certain values of rich) but not responsible. If you’re making $20 000 per year, and spending $15 000 you’re not rich, but you’re responsible. (In many years you might be rich, though.) I can think of both types of people. I don’t know how this averages out over the whole population, but it seems that the correlation between rich and financially responsible and poor and financially irresponsible isn’t as strong as one might think.
Stealing from the poor and giving to the rich is a better headline than “credit cards steal from the financially irresponsible and give to the responsible”. Or more accurately “rewards cards steal from those who don’t use rewards cards”.
With obesity, things are different. For one thing the correlation between bad eating habits and weight is (from what I can tell) much stronger than financial responsibility and income. For another, obesity itself is often the problem. If you’re overweight you’re likely to have knee problems because of the weight. Whether you got there because of genes or bad eating habits doesn’t matter. I think the same is true for diabetes, but don’t quote me on it.
loading....
@Money Smarts Blog:
“‘positively correlated’ does not mean that every single “rich” person is getting a wealth transfer from some ‘poor’ people.”
And not every smoker gets lung cancer, but they’re certainly “positively correlated.”
What’s your point, Money Smarts? That since not every single “rich” person is getting money from every single “poor” person, then there’s no value in the results of the study? Seriously, what are you trying to say here? I thought the study was pretty clear, and the general correlation between income level and credit card use is perfectly valid, so what’s your point?
loading....
@CB
I had come to this conclusion independently. Study or no study, the claim is simply common sense, IMHO:
1. Credit cards charge vendors for every transaction. I seem to recall it being something like 3%-4% for Visa/MC and 5%-7% for Amex (which is why a lot of vendors don’t accept the latter).
2. Venders charge the same whether you pay cash or credit (except for the rare gas station).
3. People who use cash receive no cash back. People with rewards cards get something like 1%-2% cash back.
4. Therefor, by induction, there is some transfer of wealth from cash users to rewards users.
5. Since cash users tend to be those who cannot get credit (often the poor) and credit users tend to be those with good credit (often the rich), this transfer could generally be seen as a poor->rich transfer, but this is obviously more tenuous than the cash->rewards transfer.
6. There is more transfer from the cash users to the vendors, as the unaccounted-for increase to cover credit fees is pure profit.
7. The credit companies are the big winners, of course, are there is strong incentive for people to jump on the credit board and no good reason to jump off.
loading....
To follow up on my previous comment (which will hopefully appear soon):
A local grocery coop, of which I am a member, ran an article last year about how different forms of payment are handled by the business, what money stays local, and how much the transaction costs:
http://www.willystreet.coop/article/739
So really, when you use a rewards card, all you’re doing is driving up the costs of your own goods. This isn’t to say I don’t use debit/credit. I do. But these days, especially at local businesses, if I have cash, I use that first, then I opt for my debit card. I only pull out my credit card (both debit and credit are through a local credit union) for online transactions, or transactions that I need to defer by a few days for whatever reason.
loading....
@Monique:
You’re obviously correct in stating that you can have rich people who are bad with money, and poor people who are good with money. But in general (which is what statistics deals with), there is a positive correlation. You might not like it, but the math is undeniable.
If what you’re saying were valid, then I could walk into a payday lender office and find a perfect cross-section of society. People of all income levels would be represented. But I’m pretty confident that you’ll agree that’s not the case. Of course, payday lenders are overwhelmingly patronized by poor people. Why is that? Because in general, poor people are less responsible with money than rich people.
Yes, there are exceptions and outliers. But in general, there is a correlation, and it’s perfectly valid to use that correlation when drawing conclusions like this study did.
“For another, obesity itself is often the problem. If you’re overweight you’re likely to have knee problems because of the weight.”
I’d argue that an exact same analog exists for finance. If you’re deeply in debt (and paying a lot of interest), it’s hard to shovel your way out, because you’re being buried by the interest charges from the debt itself.
loading....
Okay, I spent a good amount of time skimming that PDF. Someone want to explain HOW a cash payer is in any way increasing bank’s income? Wouldn’t they just be increasing merchant’s income, as the merchant jacked up the price to offset the credit card fees, which for the cash transaction they didn’t have to pay?
Kevin, there is a positive correlation that pickles cause cancer! Almost all cancer victims ate a pickle sometime in their life! So this is significant, no? Mathematical correlation is not always relevant to anything, which I think is the argument here. The correlation I think is more that poor people spend less money overall, and therefore don’t get to the point where they spent enough to start benefitting from rewards options. It is sensationalizing to say that this is because they are “poor,” not because they spend less on credit cards.
loading....
@Kevin – in very simple terms, my point is that the title of the study and this post is overly sensational.
loading....
Interesting. I agree that the inherent issue is that only those who are benefitting can choose to opt out. I could stop using my rewards card, but that won’t change the system and would just lose my rewards. I do think in general a fairer/better system would be for those using credit to pay for the convenience of that system, whether by having to pay the merchant’s cc fee or a cash-discount system.
loading....
I’m not going to repeat Kevin, but I agree with him. FWIW.
loading....
“I understand the research and accept that it’s true, yet it’s unlikely to change the way I use credit cards. Yes, I could take a moral stand and refuse to use credit for most of my purchases. But doing so would cost me a lot of money — roughly the same as my dining-out budget for a few months. (And I like my clams in butter sauce!)
But maybe I’m just being selfish.”
I would say, yes, you are being selfish. The stats are there–though you say the system is “entrenched,” there’s always a possibility to change it. And as you are on the other side of the problem, the leverage lies with you. Having read the results of this study–and having grown up in poverty and now, too, on the “other side” (and Harvard-educated and making more than my parents ever did), I certainly am going to consider what I can do to help–even if it means giving up my credit card. The system is only as entrenched as we allow it to be. A cynical attitude doesn’t help anyone.
loading....
Kat:
“Kevin, there is a positive correlation that pickles cause cancer! Almost all cancer victims ate a pickle sometime in their life! So this is significant, no?”
Wow. Are you serious?
Have you ever taken a statistics course?
This is pretty elementary stuff. There is no positive correlation between pickles and cancer, because even though almost all cancer victims ate a pickle at some point in their life, an equal percentage of NON-cancer victims also ate pickles. With the cancer correlation, there is a statistical difference. Specifically, x% of smokers developed lung cancer, while y% of non-smokers developed lung cancer. In the pickle case, x=y. In the lung cancer case, x is greater than y.
You can’t just look at one side of the equation (those who ate pickles and got cancer). You have to look at all sides (those who didn’t eat pickles and still got cancer, those who ate pickles and didn’t get cancer, those who didn’t eat pickles and didn’t get cancer) in order to draw a statistical conclusion.
@Money Smarts:
Ah, OK. I’d have to agree with you there, it’s definitely presented in a sensationalistic manner. Although I’d point out that in the WSJ article, the title was that credit cards take from the poor, but JD changed it to credit cards steal from the poor, so who’s really guilty of sensationalism here?
loading....
This study only looks at one aspect – rewards. What about the number of non-poor people (those the study defines as making more than $20k annually) get into credit card debt trouble by using cards? In fact, I know a few people in the $100k+ category that have gotten into trouble. Those people are, in effect, remaining poor because they can’t control their spending urges due to easy credit.
But also families making $150k+ annually spend more money and gain more rewards. Those in the $20k and under category could never spend enough to collect those kinds of rewards.
Although I understand this study and believe it to be correct, I’ve always known that we all pay more in stores that accept credit cards. You don’t think that the store is going to absorb the cost of credit card fees?
loading....
There needs to be more competition in the instant payment market. IMO that would lower the fees for business per transaction and thus help lower the cash only penalty or transfer of wealth. The cell phone companies are trying to get a viable alternative off the ground.
loading....
Credit card companies are not quasi-governmental entities. They act for their own interests, and we shouldn’t be surprised that social justice issues rank very low on their priorities.
If I costs me a couple of hundred bucks a year to be free of them, so be it, and good riddance.
I’ve always viewed rewards as bait on the hook for both rich and poor. The credit card companies don’t really care if you’re responsible, so long as you’re responsible enough to keep paying them when you start going under financially. It’s a trap!!
loading....
Perhaps credit card user SUBSIDIZE the poor. If we’re assuming that the rich are more likely to use cards, why not also assume that the rich are more likely to pay off their debts. If we also assume that less wealthy folks are more likely to default on their card debt, then it’s those who pay them off (and the merchants through fees) who are subsidizing the defaulters.
loading....
A few thoughts:
1) Other studies have shown that those who use plastic (reward card or otherwise, I assume) spend more on average than those who use cash.
2) The first card I ever received, back in the late 80′s, was a “rewards” card (frequent flier miles); it launched me into over 15 years of having debt of some kind or other until I swore off cards in ’03. For me, rewards cards are the devil.
3) There are so many “sand traps” that card issuers now have in store for card users that keeping track of all of them and the associated fees/charges isn’t worth it. I sleep better living a cash only existance.
4) Other commenters point out the correlation between wealth and money management skills. I’m quite sure that’s the real cause & effect, not credit card use vs. non-use (yes, a higher income and living within that income level obviously help!)
So, it probably comes down to personal choice. I vote for sticking with only cash or debit cards, myself. I’ve stayed out of trouble for well over half a decade since going into “cash only” mode. I feel the spending “harness” that cash puts on me more than makes up for any rewards…
loading....
My question is – what to do about it?
I don’t think individuals boycotting the present system will change anything.
Should the government allow 2 tier pricing? (cash and cc) which would probably cost more.
Should rewards cards be banned? This won’t eliminate the wealth transfer, but will reduce the amount.
Should credit cards be banned? This is silly.
How about – ban cash. Why can’t everyone use some sort of payment card? It can be credit, debit, pre-paid etc.
If you banned card rewards and cash – this problem would be solved.
loading....
@Money Smarts:
So, banning credit cards would be “silly,” but you consider banning cash to be a viable solution?
There was a time, not that long ago, when society ran entirely on cash, and credit cards didn’t exist. Was that a “silly” period of history?
The 2-tier pricing model is already legal. There are no government laws forbidding it. The abscence of it is due to the terms of the merchant agreements. The credit card companies require retailers to charge everyone the same price, regardless of whether they’re paying with credit card, or some other method. That’s not a government rule, it’s just a part of a contract.
Retailers who don’t take credit cards are free to vary their prices however they want. They’re free to offer a 5% discount if you pay with quarters, or charge you 15% more for paying by cheque. There are no laws regulating this. The merchant and customer are free to come to whatever terms of cost/payment they’re able to agree upon. If either party doesn’t like the deal, they walk away. No need to get government involved (except for collecting the appropriate taxes, of course).
The only exception is that you’re not allowed to discriminate based on certain factors (age, race, religion, gender, and in some places, sexual orientation). You can discriminate based on other factors, if you want. For example, many universities charge higher tuition to students who live in other provinces. Airlines can require you to pay double (that is, buy 2 seats) if you weigh too much. Hotels can charge you more if you’re a smoker. These practices are perfectly legal already.
loading....
there are so many more wealth transfers going on right now I cannot believe this is a focal point of discussion.
Case in point:
Section 8
Supplemental Nutrition Program (Food Stamps)
Public Unions
Social Security
Medicare
Government Bailouts
Housing (too many to count)
But lets focus on the 1% credit card reward wealth transfers.
It’s scary, what’s the one thing the list above all have in common. They’re all from the middle class to the poor, the rich, the ill, and the downtrodden…and people wonder why our country is crashing.
loading....
That’s an interesting study. There’s the saying “The rich get richer and the poor get poorer,” but usually only the “rich get richer” part seems true. Not here. Nevertheless, I don’t think there’s anything wrong with using rewards credit cards. This is just an unintended effect of a system to incentivize credit card usage.
loading....
I must be a bad person, because frankly, I don’t care what my use of a rewards card does to the poor.
loading....