The following is a guest post by Michael, a blogger for CreditCardForum.com. Michael has been writing credit card reviews and covering this industry for several years now. In this article, he will be discussing the controversial idea that credit card rewards are negatively impacting the lower class.
A couple of weeks ago, I came across a very interesting story in the Wall Street Journal about credit card reward programs. The article referenced a report that was recently issued by the Federal Reserve Bank of Boston, which in a nutshell, basically said that the reward programs offered by credit cards hurt the poor and help the rich. Here is a quote which pretty much summarizes this fifty-seven page report:
“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.”
A “regressive transfer” of wealth? Wow… that’s quite a bold statement to make! Now I know there are plenty of valid reasons for people to hate credit cards, but in all fairness, I don’t think this is one of them. Here’s why:
Any citizen in this country eighteen years of age or older can obtain a rewards credit card. Yes, these cards do typically require a good credit score (and that’s something we all have to work at obtaining) but the bottom line is it’s something we all can achieve. So I’m not saying they are a right, but they are a privilege we are equally given access to (much like driving).
Tiers on reward programs actually hurt big spenders
As you know, there are many cards that give higher rebates on certain categories of spending. For example, the Discover More card gives 5% cash back in various categories. However, you only get 5% cash back on the first few hundred dollars spent each quarter in those categories. After that, it’s 0.25% to 1.00% cash back.
So let’s say there were two people with this card, we’ll call them Jane and John. Now Jane is a big spender and puts $10,000 per quarter on her card in these categories. Meanwhile, John is more cost-conscious and only spends $1,000 during the same period. Since the 5% is only given on the first few hundred dollars, it turns out that the average cash back percentage (on the total amount spent) would actually be higher on John’s card than it would for Jane’s.
Of course every cash back credit card is different, but almost all of them have some sort of cut-off point when it comes to the higher rebate categories. So it’s really not a stretch to say that even the best cash back credit cards actually benefit low spenders more than high spenders.
Credit cards do cost merchants, but they also earn more from them
According to Wikipedia, in the U.S. the average processing fee on credit cards is 1.79%. They also state that reward cards run an average of 0.30% higher. So that adds up to 2.09% total. So is it logical to argue that we pay a 2% premium because of credit card fees? Not necessarily…
First of all, the average person spends more with a credit card then they do with cash. Let’s say we sent one group of shoppers to Bloomingdales and told them to bring only cash. Then we sent another group and told them to only bring only a credit card. I guarantee you the credit card group would spend more on average, per person. Why? Because with credit cards the currency we’re spending isn’t tangible or visible, so psychologically, it makes it easier to part with our money.
Stores enjoy increased sales because of this. So the argument that credit card fees forces them to raise prices isn’t logical. The cost of the processing fees is far outweighed by the increase in sales. Furthermore, processing cash and coins does take a lot of work. It requires a lot of “manual” accounting. Now I’m not saying the cost of that accounting would equals the fees, but it’s still an added benefit of card payments nonetheless.
Conclusion?
Some people may think I’m being biased and siding with the credit card companies since I am, after all, a credit card blogger! But in all honesty, that’s not the case. Believe it or not, I’m usually the first person to talk negatively about this industry – it is definitely far from perfect. Furthermore, I used to be poor myself – for years – and guess what? That’s where I learned to squeeze every penny I could from credit card rewards. So from personal experience, I can truthfully say that these rewards can benefit everyone, rich or poor. But they’re just like coupons… you won’t benefit from them if you choose not to use them!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
photo credit: Stargazer95050
