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; 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

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There are 149 comments to "Do credit cards take from the poor and give to the rich?".

  1. John says 06 August 2010 at 04:16

    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.

  2. E.D. says 06 August 2010 at 04:26

    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.

  3. Andrew says 06 August 2010 at 04:27

    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”.

  4. AnneKD says 06 August 2010 at 04:27

    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.

  5. Stefan says 06 August 2010 at 04:34

    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.

  6. Eddie Braverman says 06 August 2010 at 04:35

    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?

  7. Kristen@TheFrugalGirl says 06 August 2010 at 04:41

    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).

  8. Rob says 06 August 2010 at 04:44

    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.

  9. Money Smarts Blog says 06 August 2010 at 04:46

    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.

  10. Beth says 06 August 2010 at 04:48

    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.

  11. Solomon says 06 August 2010 at 04:51

    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.

  12. Brian says 06 August 2010 at 04:52

    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).

  13. Everyday Tips says 06 August 2010 at 04:56

    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.

  14. CB says 06 August 2010 at 05:14

    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!

  15. Chickybeth says 06 August 2010 at 05:27

    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.

  16. MichaelD says 06 August 2010 at 05:28

    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.

  17. Hannah says 06 August 2010 at 05:31

    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.

  18. Money Smarts Blog says 06 August 2010 at 05:33

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

  19. Sam says 06 August 2010 at 05:35

    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.

  20. Vikas says 06 August 2010 at 05:41

    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.

  21. Kevin says 06 August 2010 at 05:42

    @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?

  22. Kat says 06 August 2010 at 05:46

    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.

  23. cheapcookies says 06 August 2010 at 05:52

    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.


  24. Kevin says 06 August 2010 at 05:52


    “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.

  25. Nicole says 06 August 2010 at 05:52

    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.

  26. Money Smarts Blog says 06 August 2010 at 06:03

    @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.

  27. bon says 06 August 2010 at 06:08

    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.

  28. Alissa says 06 August 2010 at 06:11

    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.

  29. Chuck says 06 August 2010 at 06:12

    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.

  30. Monique Rio says 06 August 2010 at 06:21


    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.

  31. Kevin says 06 August 2010 at 06:21

    @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?

  32. Tom says 06 August 2010 at 06:22


    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.

  33. Alissa says 06 August 2010 at 06:25

    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:
    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.

  34. Kevin says 06 August 2010 at 06:26


    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.

  35. Kat says 06 August 2010 at 06:32

    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.

  36. Money Smarts Blog says 06 August 2010 at 06:43

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

  37. Panda says 06 August 2010 at 06:43

    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.

  38. Nicole says 06 August 2010 at 06:48

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

  39. Jessica says 06 August 2010 at 06:49

    “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.

  40. Kevin says 06 August 2010 at 06:52


    “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? 😉

  41. KC says 06 August 2010 at 06:53

    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?

  42. h_corey says 06 August 2010 at 06:56

    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.

  43. Peggy says 06 August 2010 at 06:57

    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!!

  44. Dan53 says 06 August 2010 at 06:59

    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.

  45. Matt says 06 August 2010 at 07:00

    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…

  46. Money Smarts Blog says 06 August 2010 at 07:04

    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.

  47. Kevin says 06 August 2010 at 07:11

    @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.

  48. Chim Chim says 06 August 2010 at 07:15

    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
    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.

  49. Tim says 06 August 2010 at 07:19

    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.

  50. MichaelD says 06 August 2010 at 07:19

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

  51. Sandy L says 06 August 2010 at 07:21

    I don’t buy it.

    First of all, I know plenty of poor people who use rewards credit cards.

    Second of all, if you want to level the playing field why not just put it back on the merchants? There is nothing stopping them from offering a discount on cash purchases. It’s certainly something that you can negotiate with smaller businesses. I know it works with contractors.

    My gut is telling me that merchants hedge and assume everyone will pay with credit and they build that into their costs. Anyone who pays with cash gives them an extra bit of margin.

    So if the “rich” are the merchants, then I guess I agree. If it’s the other credit card users, then it’s a stretch.

  52. MichaelD says 06 August 2010 at 07:25

    Chim chim has a good point…

  53. Frankerson P says 06 August 2010 at 07:27

    I don’t use credit cards, because I have no reason to. I don’t care about some stupid points offer from a crappy bank. I try to avoid crappy banks, so that probably eliminates all rewards card providers. And by crappy bank, I mean all of the big ones like Chase, BofA, etc…

    As for the rich and poor issue, it just sounds like marketing to me. Where did people think the rewards were coming from? Obviously the credit card issuer was making a profit. They make that profit from people who carry a balance and pay interest. Maybe that includes ‘poor’ people, but I would guess the middle class pays the majority of the fees and interest. They may be ‘poor’ compared to ‘wealthy’ folks, but obviously these aren’t people living at the poverty line either.

    And all these terms are relative and fairly meaningless anyway. If people stopped relying on credit cards the problems would go away.

  54. Money Smarts Blog says 06 August 2010 at 07:29

    @Kevin To be honest, I don’t think that banning cash is an easy or worthwhile solution, but it would solve the problem being discussed.

    The fact that in the past, society ran entirely on cash and credit cards didn’t exist, isn’t all that relevant IMHO. We live in a time where it is quite feasible to be a cashless society. Who cares how it was done or not done 50 years ago?

    Thanks for clarifying about the 2-tier pricing model.

  55. honeybee says 06 August 2010 at 07:31

    I don’t expect any American to act in an economically irrational way, but I do hope for it. Americans really feel entitled to and defensive of What’s Theirs. It’s very uncommon to find an American giving up something for the greater good, which is common in most other places. That’s why there is so much US opposition to taxes — it is seen by conservatives as waste, but it is in some ways a transfer of resources from rich to poor. Charitable money donations act as a security blanket to many in the US, but the amount of charity rarely amounts to much of a dent in quality of life, and really works within the same schema of wealth and profit that they are accustomed to, rather than requiring a change in thinking and action. For example, the actions of Warren Buffett and Bill Gates in giving away most of their money — it’s the same schema they’ve always used. It’s also very common in the US to hear this idea of “my actions won’t make much of a difference, so why do it” — as evidenced in comments above. It’s true that the individual actions won’t make much of a difference, but in other countries “why do it” is because you believe in it and live the way you believe.

  56. J.D. says 06 August 2010 at 07:33

    I’m guilty as charged regarding the sensationalistic headline. I even made a conscious choice to do it! But in retrospect, I don’t like it, and I’ve changed “steal” to “take”. Thanks for calling me on it.

    RE: MichaelD and ChimChim
    I don’t actually think ChimChim’s point is that good. Just because these other wealth transfer programs exist doesn’t mean we shouldn’t explore and talk about some other program. That’s like saying, “The murder rate in big cities is higher than in my small town, so what does it matter if my neighbor kills his wife?” (How’s that for sensationalistic? 🙂 )

  57. SAFTM says 06 August 2010 at 07:36

    This could easily turn into a political debate about how much to regulate and protect the poor. (Maybe it already has to some extent – not here necessarily).

    I think it’s an issue that can’t be tackled on a micro scale but only through financial literacy education. People need to do what they perceive to be better for them. Some are without knowledge to make informed decisions.

    Rewards points are like laudry quarters in college – they have a value above their utility. I once saw someone pay $20 for a roll of quarters because their parents were coming the next day, it was midnight and she hadn’t done laundry in two weeks. (Incidentally it was her parents’ $20 to begin with…). But I digress.

    The only solution that could change things would be to get rid of the rewards points. I make a few bucks on rewards points a year, but would definitely go without them for the greater good. I’m sure that what goes down comes up too – (i.e. the effect is directly on the poor but indirectly back up on those who aren’t poor through taxes or other costs). But that’s just a hunch.

    I’m afraid I may be part of the problem too. I haggle with price on almost anything and then make the decision about whether it’s cheaper for me to take the rewards or pay cash. (sometimes saying “forget it I’ll just pay with my credit card” shaves a few bucks off the price).

    Bottom line is I generally spend less when I pay cash and it usually makes up for the rewards. When it doesn’t, I use my rewards card. But I generally get better deals by offering cash and think about my purchases a little bit more. Maybe I’m part of the problem.

  58. doc4bs says 06 August 2010 at 07:39

    I feel there are some broad mischaracterizations in this abstract. First I will admit, I haven’t read the entire body of research on this subject but I do think there are 3 things we should address:
    1. Researchers bias. As a matter of definition, when you set out to calculate the actual money transfer “proved” by previous resaerch you have an inherent bias.
    2. Merchant Fees. I haven’t looked at any forensic accounting reports of major card issuers but to make the statement that specifically the merchant fees paid go directly towards the rewards program is a big leap that does not seem to be backed up with any hard numbers.
    3. The implication that if credit cards were not accepted that prices would be cheaper. As a matter of fact, the merchant fees incurred by retailers is fractional compared to the amount they would have to spend in advertising to capture customers if they disallowed credit cards.
    Lastly, as a matter of economics, lets say you opened a grocery store that only served cash customers right next door to one that catered to all customers. Which store do you think could offer their goods at a lower cost? If you think the almost assuredly much smaller “cash only” store then ask yourself why Walmart puts mom and pop stores out of business (I own a momo and pop business btw).

  59. Kevin says 06 August 2010 at 07:39

    @Money Smarts:

    I actually agree that a cashless, card-based society would be easier in many ways. If linked to a PIN, it could reduce theft and crime. Getting mugged? Just hand over your wallet. The card is useless without the PIN anyway, and there’s no cash in your wallet. Knowing this, perhaps muggers would stop mugging people and turn to other, less violent means of getting their drug money, like fraud.

    Fewer mistakes miscounting change, much thinner wallets, fewer trips to the ATM – there are definitely benefits.

    My concern about eliminating cash relates mainly to the privacy aspect of it. Knowing every single transaction can be tracked makes the hairs on the back of my neck stand up. I like having the option of conducting a relatively anonymous transaction if I feel the need (or, frankly, just plain want to – this is still a free country right?).

    What if I’m running for public office, and my opponent bribes a low-level bank employee for my CashCard(TM) records, and leaks the fact that I shopped at Victoria’s Secret, or paid the cover charge at a gay bar 8 times last month? I think cash still has its benefits.

  60. MichaelD says 06 August 2010 at 07:39


    I don’t think this is something to be ignored, but I was merely agreeing with Chim Chim that there are many many many “wealth transfers” going on in the country right now.

  61. Rob Bennett says 06 August 2010 at 07:42

    There’s no question in my mind but that having credit cards causes us to spend more. But I also agree that they are here and that they are not going away.

    I think the answer is for all of us to become more deliberate in our spending decisions. We can combat the negative effects of credit cards by developing better-informed attitudes about money.

    We don’t have to let credit cards beat us. We can take the good and leave the bad behind. But we have to work it to get there.


  62. J.D. says 06 August 2010 at 07:43

    @MichaelD, gotcha. Yes, there are wealth transfers going on in all directions. I agree with that 100%. But to me, the point of Chim Chim’s comment was that because there are other transfers, this one doesn’t matter. I don’t agree with that.

  63. MichaelD says 06 August 2010 at 07:45


    Ok, framed the way you just stated above then I agree with you. It does matter, just not to me. 🙂

  64. Kevin says 06 August 2010 at 07:49

    @Rob Bennet:

    Uhm… did you even read the article? Or did you just see an opportunity to comment-spam your own blog and get yet another link out there, to boost your Google ranking?

    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.

    At least have the common courtesy of being on topic if you’re going to comment-spam your blog.

  65. Jesse says 06 August 2010 at 07:54

    More spending is great and yes it does help drive the economy but it is not what actually enriches the country.

    By increasing spending we can rev up the economy but at some point that catches up to you (as we are seeing right now). Ideation and wealth creation are the only true long term economy boosters.

  66. Chim Chim says 06 August 2010 at 07:57

    @J.D. Roth
    Let me counter with an analogy of my own. There is an 800 lb gorilla about to attack you (huge wealth transfers) or a 1 lb gorilla (credit card transfers). Your point says ignore the 800 lb gorilla in the room but lets focus on the 1 lb gorilla. What is more likely to save your life, tackling the 800 lb or 1 lb.

    For the record, I am against all wealth transfers.

    I was making a point, not saying it shouldn’t be discussed but, let’s tackle the 800 lb gorilla first (which there are huge wealth transfers to the poor as well as the rich) instead of the 1 lb gorilla (which is a minuscule transfer from the poor). I believe these articles in the media are purely distractions to the major wealth transfers going on all around us.

  67. Kelly says 06 August 2010 at 07:58

    I’m really not a big fan of credit cards but I see few ways around having one. We use our credit cards for online purchases, travel (both business and pleasure) and gas purchases. The rewards program is a perk as long as it feels free (no annual fees). Unless we are in a special situation for a month, we always pay off our cards, but if I received a discount for cash, I would move to that pretty fast!

  68. Jesse says 06 August 2010 at 08:05

    Oh and also, I like my clams with horseradish cocktail 🙂

  69. J.D. says 06 August 2010 at 08:05

    @Chim Chim
    Ha! Except nobody is saying to ignore the 800# gorilla. You’re making that up. 🙂

    I think there are plenty of people very loudly discussing wealth transfers of all sorts: from the poor to the rich, from the rich to the poor, from the middle class to everyone. These discussions are healthy and good. (Well, their existence is good; often, the manner in which they’re conducted is unhealthy and bad.)

    I don’t discuss many of the topics you brought up because that veers into economics (which bores people) and politics (which I try to avoid at GRS). But credit cards are squarely in the personal finance camp, and fair game for discussion here.

    Anyhow, I agree that this problem seems relatively minor in the grand scheme of things, but it’s yet another example of how credit cards have fundamentally changed the fabric of our society.

  70. Adam says 06 August 2010 at 08:06

    I am of mind this is a ‘financially responsible people’ take from the ‘financially irresponsible people’ rather than the ‘rich’ taking from the ‘poor’.

    Not all rich people pay their cc balance every month, and not all poor people carry balances. But all financially responsible people should and do pay their balances in full everymonth (baring 0% transfers and such) and irresponsible people carry balances at 19% interest.

    I know that’s been discussed above but I agree with it.

  71. Jesse says 06 August 2010 at 08:07

    @Chim Chim

    How can you be against all wealth transfers?

    Unless you mean forced wealth transfer such as our government does too much of, in which case probably a more accurate word is ‘stealing’

  72. elaine says 06 August 2010 at 08:09

    I don’t really see this as poor vs wealthy, I see it as good money managers vs poor money managers. And why shouldn’t poor money managers be penalized? That’s actually more in the realm of fair than unfair. I used credit cards when I was poor and credit cards were much more difficult to come by (I think that $900 per month take-home, $700 per month mortgage, tax, insurance qualifies) but never charged anything for which I could not pay in full at the end of the month. I used them because I was trying to establish a good credit history. I still use credit cards – for the float, for the leverage they give me in dealing with vendors, and for easy record keeping. I get it that I’m borrowing money interest free and that some folks don’t qualify to do that. I believe that I earned that privilege and with responsible money management, most others can earn the same privilege.

  73. Cely says 06 August 2010 at 08:12

    I am an occasional credit card user — for travel, reimbursable work expenses, big ticket items which I immediately pay off — because I get miles.

    Recently, though, I’ve been asking merchants if they will give me a discount if I pay cash. I shop at a lot of smaller local places, and I’d say 8 times out of 10 they give me a discount, as much as 5%. So be sure to ask!

  74. Money Smarts Blog says 06 August 2010 at 08:12

    @Kevin Great points about the privacy benefits of cash. I hadn’t really thought of that.

    BTW – Comment links on most blogs (like this one) are “no follow” which means that there is no Google rank benefit to the linked blog. The only potential benefit is advertising.

  75. Cath says 06 August 2010 at 08:13

    I don’t think the issue is necessarily the poor, so much as the poor in credit. I’m a secretary, so I’m not exactly bringing in the big bucks, but I have always been careful with my credit. I got my first credit card when I was 18, back in the good ‘ol days when you didn’t need a job or a parent co-signing to get a credit card. It had a $250 credit limit, I think. I always paid it off in full each month, and now ten years later my credit limit has been increased time and time again. Now I can qualify for pretty much any card I want, because my credit is old and clean. So I use no-fee rewards cards (including my first card, which at some point was upgraded to a rewards card). My spending isn’t such that I’m making hundreds a year, but I’m making *something*. I’ve been smart with the little money I have, and I don’t feel like I’m stealing from the poor, because I feel pretty poor, anyway.

  76. Karen in minnesota says 06 August 2010 at 08:14

    There are an infinite number of goods and services that cost the poor proportionately more than then rich.

    Mortgage rates, for example, are very deliberately set much higher for the poor than for the rich. Should I then refuse to get a mortgage?

    I’m missing your reasoning why anyone “should” take a stand by refusing to use any of these businesses.

    Credit cards aren’t evil or the devil. They are instruments marketed by businesses and are designed to make these businesses money. Stores accept credit cards because they make them money, too. Credit cards charge me less for using them because I’m more likely to pay my bills–so I’m less expensive for the companies to offer credit to. Shocking, I know!

    Credit cards don’t “make” anyone poor. You can eliminate them entirely and some people will still have more money than some other people.

  77. Chim Chim says 06 August 2010 at 08:14

    @J.D. Roth
    I am discussing macro level topics when you and your site focus is on the micro level. In that frame, it makes sense

    You’re right, should have specified, I was implying government wealth transfers in our so called “free market”. Ha! And stealing is a much better word, a saying comes to mind “Don’t steal, the government hates competition”.

  78. J.D. says 06 August 2010 at 08:17

    @MSB (#74)
    Your info on “nofollow” may be outdated. It’s my understanding that Google does not care about “nofollow” now. Respecting it was causing more harm than it was helping (people were “nofollowing” all of the links on their site except the ones they wanted to give weight to), so Google stopped taking it into consideration.

  79. Mary Kate says 06 August 2010 at 08:19

    Chim Chim stated what I have been thinking as I’ve waded through the commnets. I would also add the Earned Income Tax Credit as a wealth transfer to the poor. I also dislike wealth transfer to the rich – tax breaks, public funding of NFL stadiums, etc.

    Why not ban grocery shopping at Wal-Mart because their employees make less and have fewer benefits than those employed by tradtional grocery stores? Doesn’t this hurt poor employees?

    Why not ban sales because I’m able to regularly buy items for less than those that don’t take advantage of sales? And outlaw coupons, because I save money using those, that a lot of people don’t. Aren’t they in effect subsidizing my “smart” buying?

    Don’t those that negotiate lower car prices pay for those that don’t?

    I hope the government does not get involved with this issue. I believe that every issue they involve themselves in just drives up the cost of whatever it is they deal with.

    Maybe merchants would benefit if they actively let buyers know they price they pay for using their credit cards. Maybe they could “win” by discounting by the amount of the reward earned by a credit card user. They would still pay less to the CC company and the buyer would get an immediate reward.

  80. Gholmes says 06 August 2010 at 08:20

    Ppplease. Reward cards arent making the rich rich. It is marketing gimick of the banks. And now it isnt credit card, there are debit cards with rewards.

    Wake up smell the coffee and know you been bamboozled by slick marketeers.

  81. Derek I says 06 August 2010 at 08:20

    I almost always use cash, for the following reasons:

    1. I spend less than if I used my (rewards) credit card. Research studies back this.

    2. Because of #1, I view reward cards as self-defeating: spend much to earn little. I don’t believe that “I’ll spend that much anyways.”

    And yes, credit card processing creates friction in the system, borne by *all* consumers, and that’s not fair. See #1 for the way to win.

  82. Coley says 06 August 2010 at 08:24

    These arguments often are based on the premise that credit card swipe charges cost the merchants heavily, but that apparently handling and processing cash is free. The latter point is not true. In fact, processing the cash might actually be more expensive than the swipe charges. Increased theft by employees handling more cash, increased paid labor to handle the cash, increased security to guard the cash, increased insurance on the cash in case of robbery/liability, paying armored cars to drive the cash to the bank. This all represents a serious cost to merchants that nobody thinks about when trashing the evil credit card companies.

    There could easily be a cost structure where handling cash is more expensive than accepting cards. Therefore, it may very well be that card users are actually subsidizing the cash payers.

    Now, for the second point of this argument about astute card-users collecting rewards based on the fees paid by less-astute users–anyone who feels that is unfair should also never buy anything that happens to be on sale, because people who pay full price inevitably subsidize frugal sale shoppers. If you want an i-Phone, make sure you pay full price when it’s first released, because anyone who waits for the price to come down is being unfairly subsidized by the early adopters.

    Very soon you’ll realize that this line of thinking is purely ridiculous in a free economy and society.

  83. Money Smarts Blog says 06 August 2010 at 08:27

    JD, my understanding of “no follow” and the recent change is as follows:

    First of all, Matt explains it very well here:

    Before the change – Google would pass any available page rank to any “do follow” linked sites on your page – dividing up the page rank equally among those links only.

    By using “no follow” on some links you could “sculpt” the page rank and increase it for the desired sites.

    After the change, Google divides up the page rank to all the links, “no follow” or not. However, it still only passes page rank to the “do follow” links. The net effect is that “do follow” links get less page rank than under the old system (assuming there are “no follow” links on the page.

    I stand to be corrected. 🙂


  84. J.D. says 06 August 2010 at 08:30

    Ah, I mistook what you were saying originally. Plus, I don’t know SEO stuff very well at all, as anyone paying attention will note.

  85. numpadninja says 06 August 2010 at 08:33

    Today’s post reminded me of something Henry Hazlitt wrote:

    “There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan.”

    Which makes me ponder, are rewards and penalties imparted upon us by credit card companies or are they things we impart upon ourselves?

  86. AoC says 06 August 2010 at 08:35

    A good option for the folks who can’t have or don’t want credit cards is a rewards debit card. I use a PayPal rewards card that pays me back 1.5%. (It looks like new users only get 1%.)

    I have that card linked to my checking account, so, I do not need to maintain a balance in my paypal account.

    I’ve started paying every bill that I can pay with a credit card using my paypal card, plus using it for all transactions when I am out. I make back between $10 and $20 a month.

    Bonus: every time I make a transaction that draws money from my checking account to paypal, my bank transfers $1 of my money into my (relatively) high interest savings account that I have with them.

  87. Brenton says 06 August 2010 at 08:47

    I am in the process of reading the entire PDF, but concerning its 57 pages, it might take awhile.

    My initial thoughts are contradictory to the conclusions of you, JD, and most of the others. There is no wealth transfer going on. Poor people are not actually giving money to wealthier credit card users. The reason is that you only receive a portion of the money you spend back. So there is no way of generating or receiving income. Its just a discount for credit card users, and nothing more.

    If you consider this a regressive wealth redistribution system then I hate to think of what you would call the nation’s credit rating system. A poor person will pay a much higher interest rate on anything bought with credit from a car to a home to new furniture. Substantially more. No one seems to have a problem with that system, and certainly no one is going to boycott getting a home loan in protest. Its pretty reasonable to charge more interest to people with a lower likelihood of paying back the loan. Just as it benefits everyone to have the convenience of buying stuff(or Stuff) using a credit card.

    The same “regressive redistribution system” exists all over the place. Paid in full discounts would be another example.

    Finally, I have to question why its a bad thing to reward successful people. I once worked for a division of Citigroup, and I saw firsthand some of the truly underhanded dealings that go on in the banking world. There are plenty of legitimate principled reasons to avoid big bank credit cards. Regressive redistribution of wealth from the poor to the wealthy is not one of them.

  88. Sam says 06 August 2010 at 09:09

    I disagree that this is about good money managers vs. bad money managers. There are lots of people out there using reward credit cards who are hopelessly in debt. And there are lots of people who don’t use credit cards as part of a good money management system.

    This is about reward credit cards vs. all other forms of payment. Reward credit cards cost merchants a lot more than regular credit cards, and way more than debit or cash (although cash costs merchants money to as they have to process cash, deposit it, etc.). Those costs are passed on to all consumers regardless of wealth driving up costs for all of us. you can plug in a couple numbers from your reward card to figure out how much it costs.

  89. KMJ says 06 August 2010 at 09:14

    Even if cash were the only method of payment, some portion of the population may still be less savvy with coupons, discounts, estate planning, tax advice, etc.

    Equal opportunities and equal access are important, but hard work and shrewd financial planning should also be rewarded. After all, credit cards are not without their own risks.

  90. Bridget Fagbeyiro Chapital says 06 August 2010 at 09:17

    The issue is not really whether credit cards are the culprit for the transfer of money from poor to rich households. In my opinion, it’s more of an issue of being an informed consumer.

    Benefits also exist for people that rely primarily on cash, such as when making large purchases. When my husband and I purchased a new living room set, we were able to make the purchase at a steep discount because we knew to let the store that we could pay cash on the spot for our purchase.

    Dave Ramsey also talks about this a lot in his “Cash is King” segment.

  91. Janice says 06 August 2010 at 09:29

    Just like staying poor won’t help the poor in the world, not using credit cards to take a stand won’t change anything. The bottom line is, credit card usage drives up the costs of everything to everyone. Credit in general does that. Student loans help drive up the costs of college tuition, among other factors. I’ve used cash and credit for everyday expenses (food, gas, etc.) and I notice that I am more cavalier in my purchases when I’m using credit even though I’m paying off the balance every month AND keeping daily track of it all in a spreadsheet. It’s the nature of the beast. The only difference when using a rewards credit card IF you’re paying the balance in full every month vs cash is that you’re working the c/c system a little bit to your advantage. However, how about using your inner salesperson to haggle down the prices for cash purchases? That could work the system too. There’s nothing immoral about it, it’s how things are done almost everywhere else in the world. We’re just not so accustomed to it in this country.

  92. R Hookup says 06 August 2010 at 09:36

    I look at it this way…if Michael Jordan walks into a restaurant and the manager comps his expensive meal, he has “taken from the poor” meaning that the rest of us ultimately pay the cost of a meal for a guy who could afford to pay for it. It may not be much, but it gets absorbed somewhere, much like paying him to endorse the place.

  93. AC says 06 August 2010 at 09:54

    I see the only way to curtail this problem and not let the credit cards reap in profits from shammy reward programs at the cost of businesses large and small is to offer an incentive for cash and debit card users.

    I flaw in the argument is that it costs everyone money. People are kidding themselves when they thing they get an award for their purchases. They are in essence just seeing a rebate from inflated prices.

  94. Project Management Tools That Work (Bruce) says 06 August 2010 at 10:01

    For years, I flew all over the place without being enrolled in a frequent flyer program. People thought I was nuts. To me, it just was not worth the time trying to figure out the secret handshake to get the best value out of these miles. Rewards cards are the same, for me.

    I’ve cancelled rewards cards because they often had prohibitive “gotchas” if I did something not quite right. I missed a payment date (I pay off in full every month) and so had a late fee that blew away my “rewards” up to that point. My non-rewards card, if I am silly and send a payment late, doesn’t charge me anything but the interest (which is lower than the rewards cards I’ve had).

    One has to add up all the costs, end to end (as some folks have already suggested) to determine the real “rewards.” My own single data point is that low cost, non-rewards, cards are cheapest for normal use. If this is true in general (and business does these things to make more money – so I suspect it may be true), then I suspect the study may be flawed in the same way (e.g., does not take into account the extra amount spent by the rewards card user – that would not be spent otherwise … which would be true if rewards cards correlated to higher real spending, etc.)

  95. Coley says 06 August 2010 at 10:04

    R Hookup,
    You’re free to dine at a restaurant that doesn’t comp Michael Jordan’s meal, or pay for his endorsement.

    Or, perhaps his presence in the restaurant, which is conditional upon his meal being comped, and/or his endorsement of the restaurant bring in enough extra business that the owner can provide your steak for less money than if Michael Jordan was never there.

    In the end, it really shouldn’t concern you terribly how a private business decides to spend its own money. If they offer a product that you desire at a price you think is valuable, and they do so in line with your values, then you should patronize them. Let the owner decide how he wants to market his business, or to whom he wants to provide free dinners. If he makes the wrong decision then he will not be in business for very long anyway.

  96. Metroknow says 06 August 2010 at 10:08

    The “rich/poor” correlation of this study is flawed (read: sensationalized), plain and simple. In my case, I just signed up for a rewards card at my bank yesterday. It costs $25/yr and is tied to my checking account – it is not a credit card, though I have to use my debit card as a credit transaction to get the reward. The rewards percentage is from 1% to 3% cash return. Almost any budget, at any economic level, will be able to acquire returns that beat the $2 bucks and change fee per month that this costs. I am effectively paying cash since this card uses my checking account.

    My ability to use the rewards system at my bank has nothing to do with whether I’m “rich” or “poor” – no cash minimum required, no credit check performed, and no “sorry you’re too poor” clause that I read.

  97. munjumba says 06 August 2010 at 10:09

    I was a credit card point collector that always paid my bills in full every month. I recently put away the credit card after reading a study that people spend 5% more when using their credit card for daily transactions. I figured I’d give the old debit card a few months. My expenses are down by at least 5% at this point. I received 2% in credit card points, so I’m up by 3%.

    I find that I make more impulse purchases with a credit card as it’s still a half-step away from it being my money. It does seem silly, as I was paying off the bill every month, but it’s still a deferred payment.

    For some people, this may be another argument for not using credit cards.

  98. Des says 06 August 2010 at 10:17

    I might have missed it, but it would appear that this study fails to account for the fact that people tend to increase their spending when using a card vs. cash. If card users spend more, they are increasing the profits of the merchant more than their cash counterparts. Couldn’t it be assumed that this would bring prices down for all consumers? If that is the case, wouldn’t the wealth transfer be the other way around?

  99. David says 06 August 2010 at 10:19

    Most of the discussion seems to be about how those of us paying cash are, in essence, paying those who use reward cards. However, it seems to me that the cash buyer has a few advantages:

    * The merchant gets the extra money instead of the bank or credit card company since the merchant doesn’t have to pay the credit card transaction fee.

    * Related to the previous point, the money you spend with cash stays in the community (i.e. the owner and employees) rather than going to some nameless bank which then pays it’s cardholders a fraction of a percent in the form of rewards.

    * The cash buyer could ask for a discount because they’re paying cash.

  100. nyx says 06 August 2010 at 10:29

    I like using my credit card but I’m one of those weird people who sends them a payment every friday for any payment that I made during the week. I don’t wait until the end of the month.

    I don’t think credit cards are evil, I just have one and that’s it. They’re fine if used responsibly.

  101. MrsKruse says 06 August 2010 at 10:36

    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.

  102. Frugal Texas Gal (Barb) says 06 August 2010 at 11:05

    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?

  103. Gabe says 06 August 2010 at 11:07

    “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?

  104. C says 06 August 2010 at 11:24

    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.

  105. JaM says 06 August 2010 at 11:25

    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.

  106. Mr Banana Grabber says 06 August 2010 at 11:33

    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.

  107. Mandy says 06 August 2010 at 11:39

    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.

  108. Amy says 06 August 2010 at 11:41

    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.

  109. mike says 06 August 2010 at 11:49

    @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.

  110. sara says 06 August 2010 at 11:50

    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.

  111. Money Reasons says 06 August 2010 at 11:53

    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 🙂

  112. Rob Bennett says 06 August 2010 at 11:54

    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.


  113. Bill says 06 August 2010 at 11:56

    I hardly think my 1% back is the cause of the poor credit risk’s 24% interest rate. The cause is corporate greed.

  114. Budgeting in the Fun Stuff says 06 August 2010 at 11:57

    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”. 🙂

  115. mike says 06 August 2010 at 11:58

    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

  116. JohnnyLA says 06 August 2010 at 12:21

    “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.

  117. John says 06 August 2010 at 12:38

    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.

  118. Ryan says 06 August 2010 at 13:05

    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.

  119. Amanda says 06 August 2010 at 14:47

    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.

  120. Rusty says 06 August 2010 at 15:01

    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.

  121. Dove says 06 August 2010 at 15:17

    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.

  122. Chris says 06 August 2010 at 15:18

    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.

  123. JohnnyLA says 06 August 2010 at 15:43

    “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.

  124. jim says 06 August 2010 at 16:11

    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%.

  125. Bananen says 06 August 2010 at 16:43

    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.

  126. Andrea > Become a Consultant Blog says 06 August 2010 at 16:59

    Use the money you save to vote with your wallet or free up time for volunteering for a cause you support.

  127. David/moneycrashers says 06 August 2010 at 17:58

    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

  128. Priscilla says 06 August 2010 at 18:02

    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.

  129. NerdWallet says 06 August 2010 at 18:52

    I left this comment on your re-post over at 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.

  130. PJinNC says 06 August 2010 at 19:04

    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.

  131. nyx says 06 August 2010 at 22:12

    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.

  132. BLT says 06 August 2010 at 23:41

    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.

  133. Kris says 07 August 2010 at 07:40

    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.

  134. SAFTM says 07 August 2010 at 07:48

    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.

  135. Sue says 07 August 2010 at 08:34

    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).

  136. Isela says 07 August 2010 at 09:05

    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.

  137. Tom of Oral Answers says 07 August 2010 at 12:22

    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.

  138. BD says 07 August 2010 at 15:37

    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.

  139. Janette says 07 August 2010 at 16:34

    That was the best answer of all!

  140. K.C. says 07 August 2010 at 16:49

    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.

  141. Sophomore says 08 August 2010 at 04:59

    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.

  142. Martha says 08 August 2010 at 09:05

    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.

  143. Kevin M says 09 August 2010 at 07:05

    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.

  144. partgypsy says 09 August 2010 at 11:39

    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.

  145. Steve says 10 August 2010 at 06:45

    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.

  146. SM says 10 August 2010 at 21:54

    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”.

  147. Rob O. says 12 August 2010 at 03:09

    @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.

  148. Mitchell @ TheDollarStretch says 18 August 2010 at 12:46

    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.

  149. j says 03 January 2017 at 15:49

    Regressive transfer of wealth isn’t likely to change the way you use credit cards? The tragedy of the commons strikes again! It’s so beautiful. Warms my heart every time.

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