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?
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Why is that no one ever mentions that cash has a transaction cost, too? Someone has to count it, handle it, deposit it, wait for the deposit to clear at the bank, etc. Not to mention that cash lost just through normal daily errors out of each till. Most business owners I know actually like to take credit cards because it takes them away from the cash hassle.
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I haven’t read this yet, although I will, but I’m curious how “debit” reward cards fit into this picture. I dont own a credit card but I do have a visa logod debit card and I always, always use it as a signature card and choose credit when completing a transaction. Does this make me part of the problem?
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“But maybe I’m just being selfish.”
So what? Did you climb out of debt by being altruistic?
In other words, what’s wrong with thinking about #1 first?
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I have a credit card but I only use it for things where I can’t pay cash or where paying cash is a tremendous hassle (i.e. gas stations late at night). For the vast majority of my day to day purchases, I use cash. I do think there are situations where using a credit card is preferable. For example, if I am ordering something online, I would prefer to pay with a CC and have the evidence of that payment over sending a wad of cash in the mail. So I do think they can be useful in some circumstances.
However, I think for most purchases where you are receiving the good immediately (say, at the grocery store), using a credit card for convenience is somewhat selfish–the charges the CC companies force the businesses to pay are ridiculous, and those charges are getting passed on to ALL consumers. While it’s fine to say that people who can’t handle a credit card responsibly should not have the option of a rewards card or should have to pay for their irresponsibility, it’s ridiculous that fiscally responsible people who are living well within their means should be subsidizing your vacations or even just your apparent inability to hang onto a receipt for long enough to enter it into whatever scheme you have set up to track your spending. And as for the comment “I’m going to make a donation to charity on my credit card!”, the charity would be getting more of your donation if you wrote them a check or paid in cash also, so by using the card to get rewards, you’re just making your charity of choice have to stretch what they are getting even further. Nice one.
Those fees charged by the companies really can be ridiculous–it is not unheard of for a merchant to be charged $1 even for very small purchases (say, under $5). That’s basically a hidden tax on everything you are buying.
Personally I would rather forgo a few buttered clams or a free airline ticket and know that I am not contributing to a general jacking up of prices caused by CC fees. If congress implements some legislation capping fees at a more reasonable amount (as I believe is currently the case in Europe), I might reconsider my stance, but for now I keep the card on a tight leash. I also prefer to patronize businesses that penalize the use of credit cards (with a small charge or a minimum purchase) or that offer a cash discount as often as possible.
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In the US poverty is a lifestyle choice! I believe there is an abundance of opportunity here. Maybe everyone does not have to be a millionare but certainly can work hard, save & plan towards a decent living. The recent article on CNN re college degrees that earn the least is a case in point, income after a liberal arts degree does not justify the student debt, but there is a choice.
Transfer of wealth from the lazy to the smart and hard working is a universal truth. Spreading the wealth of the hardworking to the lazy would be communism – that is proven to fail.
Credit cards should be used responsibly, there are consequences otherwise for the materially rich or poor. I still do not understand the point of this research.
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I’m a small merchant who takes credit card payments online. I stopped using all rewards cards the day I looked at my merchant statement and realized that I am the one paying for those “rewards”. When you use a rewards card and
“earn” 1% back, or whateer, it’s not the card issuer who is paying that, it’s the merchant. The card issuer just charges the merchant an extra %1 and “gives” it back to you. The merchant in turn raises his prices to compensate. So who’s paying for these rewards? You are. So think about that next time you smugly pat yourself on the back for being so financially savvy.
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I hadn’t thought of reward cards from this angle but as they say, “there’s no free lunch.” I pay for practically everything by credit card – I like the convenience and I pay off the cards each and every month. Have done for years and this report is not going to change the way I use credit cards.
I have a 17 YO and I’m trying to train her now to use a credit card this way.
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I think it’s also important to note that even with the downsides of credit ($20-50 passed on yearly to the poorest consumers), credit can be extremely helpful to people who are trying to move up an income bracket or stabilize their finances.
I’m a college student right now, currently living off of two credit cards for a few months while I’m finishing my degree. My dad has run out of money to pay for my school, so credit cards it is. I’ll graduate in December with two or three thousand in credit card debt, but with my 0%-on-balance-transfers-for-18-months card, I’ll be able to get a job and pay it off before I even incur any interest.
Needless to say, I feel pretty good about my credit cards right now.
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@95 Coley nailed it. The American marketplace is (arguably) a free market, where prices are generally set at a level the seller thinks the buyer will accept. Otherwise, the seller goes out of business.
If “poor” people accept the prices they are offered, then they are participating in the free market as well as anyone else. Prices of items reflect many variables (supply vs demand, taxes, delivery costs, etc), so the impact of the rewards card users versus non card users is really just decimal dust when all is said and done.
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I’ve been thinking about this; the cost to businesses is high and I’d rather the businesses I spend money at didn’t have to absorb such high costs of credit cards.
Yet I do get a lot of cash back from my card. It does encourage me to use it. However, from a personal managing-cash-flow perspective, I suspect I would spend less and sometimes more mindfully if I were not using a credit card. I’d probably save more in a year than I get back in rewards. Sometimes I go through a streak where I use much more cash and less credit, partly out of a desire to “feel” it when I spend money — in a good way; I like to spend money, and I like feeling the cash. Sometimes when I use primarily a credit card, I feel as though I’m not spending any money… yet I am!
If credit card companies couldn’t charge such high fees to businesses who run the charges, the system of rewards might be more in line.
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When I was younger I didn’t use credit cards hardly at all. But once the reward cards came out, I tried to use it as much as possible while still paying off the balance every month.
I used my reward points (a GM Card at the time) to help me purchas my current car (a Malibu), buy deducting almost $3000 off of the price!
Now I use my rewards card (now citicard) rewards for getting camcorder (2 years ago) and soon a new 50″ TV! It has taken my years to save up enough for the TV though!
I’m still not rich, but I am frugally wise
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The article has nothing to do with unconsciously spending more when using a credit card. The article is about reward programs and a surreptitious transfer of wealth from lower-income earners to higher-income earners.
The rewards program issue does not strike me as being a big deal, Kevin. The issue of people being encouraged to spend more strikes me as being a far bigger deal.
I believe that the spread of credit has hurt poor people in a big way. The poor are more likely to overspend than the rich (because they have to overspend even to buy the basics). I don’t think that we should do away with credit cards. But I do think we should be concerned about the effect on the poor. So I advocate doing things that help poor people be more conscious in their spending decisions. That matter is not directly raised in the blog entry. But I see it as being raised tangentially.
I am not able to offer any take whatsoever on the study. It just does not do anything for me one way or the other. But I think it is fair to say that the blog entry brings up the question of how the popularity of credit cards has affected the poor. Even the study brings up that general point, although as you note it hits at the point from a different direction.
It wasn’t my intent to upset you. And I didn’t post for the purpose of getting a link (as has been noted, the link here is no-follow in any event). My thought in contributing was more just to share my thoughts with the community that meets here.
I think what drove me to post is that I care a lot about the poor vs. rich issue. But you are right to note that the particular issue raised in the study just doesn’t click with me. In my mind it seems like a distraction from a far more important issue that it gets at from a different (and less compelling to me) angle.
Rob
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I hardly think my 1% back is the cause of the poor credit risk’s 24% interest rate. The cause is corporate greed.
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I did my staff writer post on this article at Sweating the Big Stuff this past Wednesday.
Here’s the 7 reasons I’m still going to use my reward cards:
1. I feel safer carrying easily cancelled credit cards than I do when I carry cash.
2. My reward cards offer me benefits other than credit including longer warranties on electronics.
3. I don’t think that merchants would go back to pre-credit card prices even if I didn’t use a rewards card.
4. It’s easier to budget since I use credit card statements to input my spending data. It’s also a huge part of how I automate my finances.
5. Credit cards offer a grace period so we can get our ducks in a row before paying – very useful with our biweekly paychecks.
6. My husband and I spend less with cards than with cash because the record stares us in the face for the month. Cash seems to drip out of our wallets when we’re not looking.
7. Making $350 a year seems better to me than spending $23.
My husband also added “it doesn’t make my wallet freaking ginormous”.
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Another thought:
Do Income Taxes Take from the Rich and Give to the Poor?
I’m tired of hearing all the whining about the distribution of wealth in the USA. Compared to the rest of the world, America’s poor are still rich. And if folks want to improve their current existence, then there’s a simple formula:
Savings = Income (I) – Expenses (E)
If I>E, you will accumulate wealth
If E>I, you will accumulate debt
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“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.”
The problem that I see (if it’s really a problem or just the way capitalism works) is that credit cards companies are out to make a profit, of course.
Why would they REALLY give incentives to people of less means that are very good money managers?
They won’t make any money from them because:
1) trapping them into some ridiculous fees or suddenly adding a annual usage fee. They’ll just cancel the card or not pay. It’s expensive for a credit card company to go into collections esp. if the money owed is smaller that a typical user.
2) They won’t have higher balances or purchases at vendors so those fees for every transaction that the vendors pay are now non-existent.
3) They are “dead beats” in the sense that they pay off their (lower) card every month.
OTOH, typical or higher income credit card users use their cards way more often, which create vendors fees, which create a good opportunity to get some great money if/when they jack up the percentages and the user slips just once with a large balance. They also will most likely stay on the card even with an annual fee.
So, are they going to do this out of the goodness of their hearts? Riiiiight.
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I haven’t read all of the comments, so someone may have already stated what I’m about to.
Seems many people took from this that it was the rewards programs that was taking from the poor and giving back to the rich. The rewards programs are only a part of the system that is to blame. Now the rewards are a kick-back to credit card users, the more they use the card the more money the credit companies make. It doesn’t even have to be an incentive to spend more, though that often may be. It really just needs to be an incentive to make more purchases with the card than without. If you know you’ll get rewards you’ll likely use the card instead of paying with cash. This brings in more fees payed by the merchant.
Which brings me to my next point. Regardless of whether or not you have rewards, when you use a card, credit or debit as a credit transaction with a visa, mastercard or whatever logo on it you earn a fee for the owner of that logo. You however in most cases pay the same price as someone paying cash. This raises the price of everything a little bit because it adds to the overhead of the businesses that are accepting cards. So while you’re not getting richer by using the card unless you’re getting the kick-back rewards, you and everyone else are funneling money into the credit companies. Theoretically if everyone stopped using cards the price of everything could drop, but they likely wouldn’t because the merchant would be happy to sit on a bit more profit.
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I find the discussion for this post disturbing to say the least.
As far as I can tell, nothing in J.D.’s article indicated that all credit card users should immediately stop using them or that they’re somehow bad people. It was just a look at some of the hidden costs of prevalent credit card use.
Setting that aside, what shocks me the most is the large amount of commenters here saying such things as, “It’s not my fault if poor people are stupid” and so forth. Last time I checked, this was a personal finance blog geared towards educating people about the subject. If you’re already an expert at personal finance or if you’re already wealthy, then why would you come here in the first place?
The reason I’m asking this is because it seems, at least to me, that the general atmosphere of this blog has changed recently. I’ll read the comments for user submitted stories – where J.D. puts a disclaimer kindly asking people to be nice – and see people harshly criticizing the user who submitted the story. And then there are posts like this where people are up in arms defending themselves even though I have yet to see a so-called “poor person” come on here and suggest that people should give up their credit cards.
There are some benefits to using cash instead of credit cards, even though the benefits might not be as great as rewards programs. For instance, if you’re a paranoid conspiracy-theorist, then using cash leaves less of a trail for people to track you with. With credit cards (and debit cards), companies and the government could theoretically watch your every purchase. This not only gives them information about what you buy, but also about what areas you frequent. Like I said, it’s not necessarily better than rewards programs, but it is a benefit that is often forgotten about using cash.
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Unfortunately, the herd has mooved in the direction of reward cards. And if every individual is unwilling to give up their points, miles, whatever to ‘take a stand’ then nothing will ever change.
I think having discussions about the pitfalls of reward cards is a good first step though. There are going to be some people who are moved by this information to make a change in their spending habits. And we can always hope that enough people will get involved and speak up so those cash-paying folks stop subsidizing people’s airmiles.
Though really, the card people are also paying the higher prices on goods and services. So your airmiles or Optimum points or whatever aren’t really free. You just can’t SEE the cost. Just another hidden tax that consumers are willing to shoulder.
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I work with a lot of the poor people every day. It amazes me the poor choices they make and the things they think about. I know one two brothers. One is on his way to accumulating wealth, the other is stuck in debt; making bad decision after bad decision. It’s a choice to look at your life and decide if you want to change it. No one but you can do it.
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It should be illegal for credit cards to prohibit merchants from charging a fee for credit card use. Merchants should have the option of passing the transaction fees on to the user transparently (or giving a cash discount if they prefer).
I am not normally one to reach for government regulation as a tool to solve a problem, but it seems to me that a situation in which one party can dictate what another charges a third is a problem for the free market.
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The very poor pay more for almost everything. Probably more outrageous is healthcare. Our insurance companies negotiate lower fees. The poor that can’t afford insurance don’t have the buying power to do that. They often don’t have the transportation to go to grocery stores with better deals. And they pay incredibly high interest when they have to borrow. I guess they buy our cast off clothes for less. I’m not sure what to do about it though.
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“The reason I’m asking this is because it seems, at least to me, that the general atmosphere of this blog has changed recently. I’ll read the comments for user submitted stories – where J.D. puts a disclaimer kindly asking people to be nice – and see people harshly criticizing the user who submitted the story. ”
Well, they are saying their opinion. If it was too atrocious the comment will be bounced and the person flagged.
The comments are still way, WAY, better than the icky feeling you get when you wade into a comment section from a site like MSNBC. Everything devolves rather quickly.
I am still surprised that people can twist an article on hair spray and do a “7-degrees-to-Kevin-Bacon” but instead of “7 degrees” it’s 2 and instead of “Kevin Bacon” it’s Obama ruining the country or Republicans ruining the country.
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There is nothing stopping merchants from giving a discount for cash. Its done all the time and nothing in the credit card rules to stop it. The credit card rules don’t let you charge a % or surcharge for accepting their card, but they don’t stop you from giving a discount for using cash. Its a common misperception. So merchants CAN absolutely fix any problem of inequity by giving a discount for cash.
I saw this study discussed in another blog and I made this same point there:
This bit says “each card-using household receives $1,482 from cash users every year.”
This doesn’t seem to pass a common sense check to me. Who is getting $1,482? Say you get 2% cash back on your purchases, if you get $1482 back then that means you would have had to spend $74,100 in purchases. (74100 * 2% = 1482)
The average card carrier does NOT spend $74k in a given year on their card. And the average cash back return is not even 2%, its probably closer to 1%.
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The study is clearly written by people who don’t really understand the market and why businesses act the way they do.
Shops don’t just accept expensive credit cards and then rise their prices additionally. If they did this they would not survive competition from shops that don’t accept credit cards.
A business agrees to accept credit cards because they expect to have a higher turnover, due to an increase in (credit card carrying) customers. It is these extra customers who pay for the fees and rewards.
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Use the money you save to vote with your wallet or free up time for volunteering for a cause you support.
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The premise makes sense, but its still a bunch of crap.
If those that use cash don’t know the advantages of using credit, then so be it. And if they don’t have credit cards because of their situation, then they need to change it so they can have them
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First of all poor people aren’t the only ones using cash only. Those without any kind of debt (consumer or mortgage), the responsible ones, use cash also. I like to use my credit card only if I get an incentive. If vendors give me a 1% to 5% discount for cash everytime, then I would be willing to go ‘cash only’. Discover offers 5% rewards for certain types of purchases. That’s a lot better than cash only.
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I left this comment on your re-post over at favstocks.com as well, so please forgive the repetition
While I don’t have the data to say for sure whether there is a subsidy from the poor to the rich in the form of credit card rewards, I can’t believe the results of this paper.
In order for the “average” credit card user to earn $1,500 in credit card rewards each year, the “average” credit card user has to spend upwards of $150,000 per year. If you read the paper, you’ll see that they assume a 1% rewards rate. Even if you assume up to a 2% rewards rate (which is rare), we’re talking about $75,000 in spending.
Ignoring the paper itself, let’s do a back of the envelope. How much higher would prices need to be for merchants to make up their fees? Even if we assume every merchant in the country was paying the maximum 4% fee, and credit cards account for 15% of credit card purchases, prices will have to be 0.6% higher on average to make up the fees. This means that for every $10 a cash payer spends, they’ll have to cough up an extra 6 cents.
This leads me to believe that the model used in this paper exaggerates the degree of any potential subsidy. And I get the impression that no one who has reported on this Boston Fed paper read past the page one abstract, which is unfortunate.
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I have a rewards card for hotel points. It saves my family a good deal on travel to see our relatives. I know that the rewards program makes transactions more expensive, so I try not to use it at local businesses while using it every time at large corporations who can more easily absorb the fee.
The transaction matrix is very complicated, and compared to other things like weak minimum wage laws and our current health care system, any financial transfer from poorer to richer is probably dwarfed by other greater structural forces in the economy.
In short, I don’t worry about this.
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btw no I don’t think that credit cards steal from the poor. I really dislike it when people imply that the wealthy steal from the poor. Not saying that you JD are saying this, but people in society say that and its not true.
It seems anytime anyone in the media says “oh the wealthy steal from the poor” that they do it because they hate the wealthy, and then because they’re anti-capitalist. I would rather have capitalism than socialism. Even in socialists countries people try to take as much as they can for themselves.
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Good article and some great points. With my personal experience with credit cards in the past I noticed I would spend more than I needed. I still have credit cards but rarely use them, I prefer to use a debit card instead and find that it works much better when trying to stick with a budget.
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To answer your question, yes. And it’s too bad. But it’s life. And credit cards are optional, so you don’t have to use them. It is up to each of us to use them to our advantage, however that works best for each of us. Sure, I’d like to have lower fees and interest rates. But I’d love even more to not ever need credit cards in the first place.
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I think “rewards” are really not the problem with credit cards, but the use of cards in general. It seems that many people feel they “need” credit cards to fund their lifestyle. And it seems that those same people either don’t think they are “living large” or “deserve nice things.” If you’re one of those, in my opinion, credit cards are not for you. If you can manage your cards wisely so that they do not increase your spending and you pay them off at the end of the month then rewards or not, you’re probably doing ok.
I don’t think this is a simple rich/poor debate though.
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These comments are among the more disturbing I’ve seen on this website (where the comments are usually far kinder and more generous in spirit).
But when I think about the options the current system gives us, I can see why we have an uncomfortable mix of outrage and defensiveness.
I can either use a rewards card, and contribute to an increase in prices for everyone no matter how they pay. Or I can decline to use a rewards card and end up subsidizing the rewards of everyone who does.
The best solutions I saw were from people who suggested requesting discounts from merchants for using cash. That seems the best route to opting out of this trap altogether, but only if merchants will go along.
Otherwise we’re trapped in a system where there’s no “neutral” position (i.e., where you are neither taking advantage nor being a chump).
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I never thought about this issue, but it makes perfect sense : if you use a product you may get some perks for that.
There may be some individuals with enough cash that had decided not to use a credit card, even though they are perfect candidates for them. I believe is a matter of choice in most of the cases.
Do I feel bad ? Not really.
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Credit card companies have always charged merchants fees. A while back, they figured out that they could get more customers by transferring a portion of these fees back to the card user in the form of rewards. Is it better for the money to go to the company or back to the credit card user?
Here’s a different point. If I use coupons am I being selfish? The company that put out the coupon worries about their bottom line. If they’re not making enough, they’ll have to raise their prices and charge more. Then I would be taking money from those that didn’t use coupons because they would be faced with higher prices.
What if I use a coupon at a local store that doubles it?! Then they will have to raise their prices for all of my neighbors. In effect, I would be taking from my own neighbors…
I think you can come up with so many different examples for this. People have a choice, they don’t have to pay with cash. If they do, then they risk losing out on the rewards that those who pay with credit cards receive.
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Huh? I think I’m missing something here. I’m poor as dirt…well below the poverty line (My income is around $9,000 a year now), and using a credit card is one of the ways I GET money.
I put everything I possibly can on my credit card, while keeping track of how much I spend. I don’t spend any more on the credit card than I have cash for in the bank. Then, I pay off the credit card in full every month. This in turn gives me points, so I can get MORE money. $9,000 a year = 9000 points = $75.00 that I didn’t previously have. I usually use that for Christmas gifts.
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Tom-
That was the best answer of all!
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My understanding of the recently passed Finance Reform Bill is that it specifically limits swipe fees charged to merchants by credit card companies and allows merchants to offer a cash discount. When it is enacted, it will solve this problem. And may signal the death of rewards.
David@ * …the money you spend with cash stays in the community (i.e. the owner and employees) rather than going to some nameless bank…
Actually, most of the proceeds from credit card sales do stay in the community. The credit card processor wires the money to the merchant’s bank account. To the merchant, it is the same as cash, except for the deduction of fees. In my case, the fees amount to 3% of the total sale plus a 30 cent transaction fee.
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OK folks, let’s connect some dots (aka Political Science 101):
* Congress just created a new consumer financial protection agency.
* The new agency reports into the Federal Reserve.
* The Federal Reserve issues a report on credit card reward programs.
* The report beats a populist drum on a wealth transfer that goes the wrong direction.
Probable outcome – new agency takes up credit card reward programs as one of the first reform tasks.
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I thought this result obvious, though the argument here has been poorly framed. It’s not about rich v. poor; it’s just those who use credit and those who don’t. (People who do not use it well will probably be poor, but that’s secondary.) I made ~$20,000/y for most of my 20s as a grad student and nonprofit worker, and I religiously used credit cards. I was offered my first credit card as a college student, when I had no income. I was very aware that merchants increased prices to accommodate card holders, and I favored the credit card companies that shoveled benefits back to consumers. I do sometimes pay for gas in cash if the cash price is cheaper than the credit price after benefits. In other countries, there can be big discounts for cash. If I think the business isn’t involved in tax evasion, I will then sometimes pay cash.
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I agree with your take, JD. It did make me think twice, but in the end I have to do right by my family. We make a few hundred bucks a year from our rewards, so I’ll keep doing it.
I absolutely disagree with the need for government intervention. This is capitalism at work, for better or worse. Outsourcing personal financial responsibility to the government for this type of thing is utterly ridiculous in my opinion.
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I find this article completely uninteresting and intuitively obvious. The next article will be about how payday loan stores prey on the poor and not the rich.
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I’m surprised that so few commenters got what is really going on here.
Credit cards don’t take from the poor and give to the rich. What they do is take from ALL of us and give some back to a subset (which, if the study is to be believed, is mostly the rich.)
No single person or small group boycotting credit cards will solve this problem. So to use a rewards card is nothing more than working within an existing system.
The free market has not solved this problem, so it is left to government regulation. Remember that the government is not some entity outside ourselves – it is a group of people, and furthermore an agent of all of us. I can think of two ways the situation could be regulated (there are undoubtedly more: 1) Regulate swipe fees 2) Outlaw the clauses the card companies put into merchant contracts that prohibit charging credit users (passing the interchange fees on to the person “causing” them.)
It’s true that cash discounts are allowed, but the reason they are allowed is probably because a “discount” is a carefully worded way of avoiding talking about the cost of the other option. Also, regulating away rewards won’t help much – maybe a little, but it would hurt more than it would help.
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I don’t understand why it’s a moral choice at all. Some credit company chose to pay me a little each time I use their product. Nice! Of course, they could instead have chosen to give the same money to “the poor”, or children in Africa, or cancer research or whatever. But this even remotely not a moral question – if you’re concerned that your favorite charity cause doesn’t get enough money, just donate whatever sum you think necessary. I don’t see a place for feeling guilty here – it’s not your moral obligation to have money distributed in a certai way between people (not that $23 per year would change anything anyway). The market does its work, and yes, credit companies like the rich more than the poor – just as lenders like people with good credit better, or hotels like frequent stayers, or airlines like 1st class flyers. There’s nothing wrong with that.
And calling it a “tax” as some do in comments is a travesty – tax is the money that government takes by force from citizens and uses as it sees fit. It is exactly the opposite of the market – and if somebody comes better off certain market transactions, it has nothing to do with “tax”.
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@Sam said:
“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.”
@Alissa said:
“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 that’s simply going to give you some of that money back.”
The problem with the “take a stand” line of thinking is that cash-only customers pay the same price. But since rewards card users get cash back they are, in effect, actually paying less than a customer using cash (or checks).
My wife & I aggressively “game” this system. We use our cashback rewards cards for practically everything. When we’ve maxxed out the annual rewards from our Citi Dividends Mastercard, we switch over to a AmEx cashback card for the remainder of the year. And we’re considering getting a Capital One No Hassle Cash Rewards card since Citi has butchered around on the rewards offered on their Dividends card this year.
The single biggest trick in this “game” of ours, however, is that we’ve got to be (and are) disciplined enough to never, ever carry a balance from one month to another. The interest charges would quickly chew up the cashback earnings different if we got sloppy.
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I am pro- responsible credit card use – if for no other reason than the tremendous benefit that 0% balance transfer offer can be used for. When I read this post, I kept thinking “but don’t all of us responsible credit card users pay a financial price for the irresponsible use of credit cards by others?”. Are higher interest rates and fees the result of lenders having to recoup losses resulting from the poor credit behaviour of others (those who default, file for bankruptcy or settle their debt)? Could this be considered in a transfer of wealth context? I realize this doesn’t correlate exactly with the ‘transfer of wealth between rich and poor’ being suggested … but I’d be interested in a study outlining the effect of irresponsible borrowers on the cost of credit.
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