{"id":39121,"date":"2010-08-06T04:00:07","date_gmt":"2010-08-06T11:00:07","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=39121"},"modified":"2019-10-14T01:58:03","modified_gmt":"2019-10-14T08:58:03","slug":"do-credit-cards-steal-from-the-poor-and-give-to-the-rich","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/do-credit-cards-steal-from-the-poor-and-give-to-the-rich\/","title":{"rendered":"Do credit cards take from the poor and give to the rich?"},"content":{"rendered":"

My philosophy on credit cards has changed completely in the last five years. I’ve gone from anti-credit-card to pro-credit-card \u2014 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.<\/p>\n

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<\/a> from the Federal Reserve Bank of Boston) found that credit cards transfer wealth from the poor to the rich<\/strong>. How? Through fees and rewards programs.<\/p>\n

From the abstract:<\/p>\n

Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or \u201ccash\u201d) 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.<\/p>\n

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.<\/p><\/blockquote>\n

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 \u2014 in most cases, credit-card companies prohibit stores from adding a fee for credit-card use \u2014 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.<\/p>\n

Note:<\/strong><\/em> There are many other ways in which the poor pay more than the rich. Wealthy people are more likely to negotiate. (No evidence \u2014 my own belief.) Wealthy people usually have the ability to wait<\/em> before buying something. Wealthy people tend do have more buying options (and thus find lower prices). And so on.<\/div>\n

There’s a lot<\/em> 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.<\/p>\n