Credit cards give to the rich, take from the poor
A new study says credit card fees and rewards are subsidized by consumers who pay with cash, including low-income folks. Is that fair?
Remember all that election year hubbub about "spreading the wealth around"? A new Federal Reserve Bank of Boston study (.pdf file) says a big redistribution of wealth -- from the poor to those who are better off -- is happening every day when people use credit cards.
It's common knowledge (or should be) that everyone pays more for goods because of fees merchants must pay for credit card transactions. So where does this income distribution come in?
Brent Hunsberger of The Oregonian summed it up nicely:
That's because cash payers (which includes those paying by check, debit card or prepaid card) are largely lower-income consumers, and they end up footing the bulk of "merchant fees" charged by banks to process card use, the study says. Higher-income consumers reap hundreds of dollars of gains each year because they use cards more often and cash in more rewards.
That means each day at a cash register, we engage in a significant transfer of wealth from the poor to the wealthy. The poor give up greenbacks. The wealthier among us get free airline tickets and magazine subscriptions.
The study put some hard figures on the amounts involved, including merchant fees and card rewards:
On average, each cash buyer pays $151 to card users and each card buyer receives $1,482 from cash users every year, a total transfer of $1,633 from the average cash payer to the average card payer.
The magnitude of this transfer is even greater when household income is divided into seven categories: on average, the lowest-income household (less than $20,000 annually) pays a transfer of $23 and the highest-income household ($150,000 or more) receives a subsidy of $756 every year.
Finally, about 83% of banks' revenue from credit card merchant fees is obtained from cash payers, and disproportionately from low-income cash payers.
See? While you're racking up your frequent-flier miles or cash back, people who make less money than you are actually paying for them.
Wait a second, you say. Didn't financial reform recently signed into law limit the fees on cards? That applies only to debit cards. With credit cards, it's the same old game.
The New York Times' Ron Lieber, who raised the possibility "that the poor pay subsidies to finance the rewards of the affluent" in a column early this year, suggested that if you feel guilty about having your rewards subsidized by people who can least afford it, you could contribute some or all of your rewards to charity.
What do others think? Some said life is unfair but sometimes it balances out. Bucks blog reader P. Henry wrote:
For example, the rich get interest on their higher bank balances, while the poor, if they have bank accounts at all, pay maintenance fees on their low balances, not to mention outrageously high fees for overdrafts, etc. … On the other hand, we have all manner of subsidies and entitlement programs that do help the poor, and are paid for by taxes which are, in absolute terms, disproportionately paid by the "wealthy."
Others said the poor have only themselves to blame: "If these so-called poor are paying $23 extra a year for my rewards cards, I say that's GREAT. I call it payback and getting what you deserve." Ouch.
My view: I think it's less than fair that I am paying more for goods because other shoppers are using credit cards so they can reap the rewards. If retailers set lower prices for cash purchases -- and they'll be able to under financial reform -- I'd happily hit up the ATM before heading to the store. As it is, I generally use my debit card -- and say "debit" -- because the fees charged to merchants for debit card transactions are lower -- and will probably drop some more, also because of financial reform.
But lowering prices for people who use cash could have unintended consequences. Daniel Indiviglio of The Atlantic said card companies would likely raise fees and interest rates to make up for lost revenue if people used credit less often, harming those who use credit as a last resort and can't pay off their balance each month. There's no easy solution here.
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