Do credit cards take from the poor and give to the rich?

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.

Note: There are many other ways in which the poor pay more than the rich. Wealthy people are more likely to negotiate. (No evidence — my own belief.) Wealthy people usually have the ability to wait before buying something. Wealthy people tend do have more buying options (and thus find lower prices). And so on.

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?

More about...Economics, Credit

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
149 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
John
John
10 years ago

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… Read more »

E.D.
E.D.
10 years ago

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.

Andrew
Andrew
10 years ago

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… Read more »

AnneKD
AnneKD
10 years ago

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… Read more »

Stefan
Stefan
10 years ago

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.

Eddie Braverman
Eddie Braverman
10 years ago

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… Read more »

Kristen@TheFrugalGirl
10 years ago

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).

Rob
Rob
10 years ago

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… Read more »

Money Smarts Blog
Money Smarts Blog
10 years ago

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.

Beth
Beth
10 years ago

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.

Solomon
Solomon
10 years ago

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… Read more »

Brian
Brian
10 years ago

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).

Everyday Tips
Everyday Tips
10 years ago

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.

CB
CB
10 years ago

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… Read more »

Chickybeth
Chickybeth
10 years ago

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… Read more »

MichaelD
MichaelD
10 years ago

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.

Hannah
Hannah
10 years ago

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.

Money Smarts Blog
Money Smarts Blog
10 years ago

JD, the link to the study is incorrect – your home url has been inserted in front of the actual url.

Sam
Sam
10 years ago

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… Read more »

Vikas
Vikas
10 years ago

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.

Kevin
Kevin
10 years ago

@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?

Kat
Kat
10 years ago

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… Read more »

cheapcookies
cheapcookies
10 years ago

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… Read more »

Kevin
Kevin
10 years ago

@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… Read more »

Nicole
Nicole
10 years ago

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… Read more »

Money Smarts Blog
Money Smarts Blog
10 years ago

@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… Read more »

bon
bon
10 years ago

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… Read more »

Alissa
Alissa
10 years ago

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… Read more »

Chuck
Chuck
10 years ago

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.

Monique Rio
Monique Rio
10 years ago

@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… Read more »

Kevin
Kevin
10 years ago

@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?

Tom
Tom
10 years ago

@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… Read more »

Alissa
Alissa
10 years ago

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… Read more »

Kevin
Kevin
10 years ago

@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.… Read more »

Kat
Kat
10 years ago

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… Read more »

Money Smarts Blog
Money Smarts Blog
10 years ago

@Kevin – in very simple terms, my point is that the title of the study and this post is overly sensational.

Panda
Panda
10 years ago

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.

Nicole
Nicole
10 years ago

I’m not going to repeat Kevin, but I agree with him. FWIW.

Jessica
Jessica
10 years ago

“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… Read more »

Kevin
Kevin
10 years ago

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.… Read more »

KC
KC
10 years ago

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… Read more »

h_corey
h_corey
10 years ago

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.

Peggy
Peggy
10 years ago

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!!

Dan53
Dan53
10 years ago

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.

Matt
Matt
10 years ago

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… Read more »

Money Smarts Blog
Money Smarts Blog
10 years ago

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.

Kevin
Kevin
10 years ago

@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… Read more »

Chim Chim
Chim Chim
10 years ago

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.

Tim
Tim
10 years ago

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.

MichaelD
MichaelD
10 years ago

I must be a bad person, because frankly, I don’t care what my use of a rewards card does to the poor.

shares