Credit Cards — Robin Hood In Reverse

The Federal Reserve Bank of Boston found that credit card fees and reward programs have the net effect of transferring wealth from the poor to the rich:

U.S. consumer finance data shows that people on a low income are less likely to have a credit card, and those who do, spend less a month on average, than higher earners. High-income consumers are also 20 percentage points more likely to receive credit card rewards — be they frequent flier miles, cash back or other enticements.
“What most consumers do not know is that their decision to pay by credit card involves merchant fees, retail price increases, a nontrivial transfer of income from cash to card payers, and consequently a transfer from low-income to high-income consumers,” Scott Schuh, Oz Shy and Joanna Stavins wrote.
They found that about 83 percent of banks’ revenue from credit card fees is obtained from cash payers “and disproportionately from low-income cash payers.”
After accounting for rewards paid by banks, households who earn more than $150,000 annually receive a subsidy of $756 on average every year, while the households earning $20,000 or less pay $23.

Posted by Eddy Elfenbein on July 27th, 2010 at 2:23 pm

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