Anyone who regularly engages in personal finance discussions knows the benefits of credit card rewards. In return for your usage of their rewards card, credit card companies are willing to pay you back a percentage of your purchases either through cash back rewards or through a points system.
For people who take advantage of those bonuses, the perks can be pretty sweet. However, have you ever wondered how credit cards make up the cost of paying its rewards members? After all, it’s not like banks are running a charity here.
Well, not too long ago, the Federal Reserve Bank of Boston released a study showing rewards credit cards actually pay the rich by taking from the poor.
“On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 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.”
Basically, this happens because wealthy consumers are more apt to use rewards cards than lower-income consumers, which consequently means the extra costs are passed on to them. In order to understand how this works, you need to understand why banks offer rewards for credit cards in the first place.
Why Some Credit Cards Come With Rewards
By now, all consumers know that credit card companies make money by charging them fees and interest for carrying a balance. What some might not know, however, is that each time a consumer uses a credit card, the business accepting the transaction is actually charged a small percentage (maybe 1 or 2 percent, but sometimes more) of the total purchase. This is known as the interchange fee, or merchant fee.
So even if you don’t carry a balance month to month, credit card companies still make money every time you use your card. As a result, it makes sense for them to offer incentives for more usage of plastic over paper. This is also why your bank encourages you to use your check card as a credit card and stores would prefer it if you used your PIN number.
While big chain stores like Wal-Mart or Target can leverage their business volume to negotiate down the merchant fees they pay to some degree, your typical mom and pop shop cannot. In order to make up that cost, businesses then have to raise prices for everyone and put the burden back on all their customers.
It’s illegal for businesses to only charge merchant fees for card-using customers, so they have to spread it out across the board. Some merchants do offer discounts for customers who use cash, but since not all interchange fees are the same, it could be difficult to strike the right balance in prices.
Are the Rich Really Benefiting From the Poor?
Indirectly, it does seem that way. More directly, it really just boils down to the fact that rewards card users are benefiting from cash, check and non-rewards card users. Since most low-income households either don’t qualify for credit cards, can’t afford the interest or whatever other situation may be that prevents them from being able to use rewards cards, the increased cost does seem to fall on to them.
It’s hard to say with 100 percent certainty, however, if that is the case every time. Some merchants are willing to absorb some or all of the cost. While that doesn’t seem ideal for the mom and pop shop, vendors who accept credit card users do enjoy benefits like increased customer spending as well as reduced costs of having to handle physical money such as counting it, depositing it at the bank and protecting it from theft.
So when it comes to credit card rewards, as the saying goes, if you can’t beat ‘em, maybe it just makes more sense to join ‘em.
Will knowing this affect whether or not you’re going to use your credit card more? Do you think it’s fair for interchange fees to be passed down to non-rewards card users?
