The Truth About Credit Card Rewards Is Bad News For People Of A Certain Income Level
Financial guru Dave Ramsey has an expression he often spits out whenever the topic turns to credit cards and credit card rewards.
“Not one person has ever built wealth off credit card points,” Ramsey will say, or some variation of the statement.
In other words, using a credit card for purchases to build up rewards points or get cashback is a fool’s game.
For some people, though, using a credit card is necessary, especially for small business owners or entrepreneurs who need to make purchases while still waiting to get paid for work completed. In those cases, using a credit card with a reward system seems logical.
Unfortunately, as this article on Vox explains, those perks don’t come out of a bank or lender’s pockets. America’s poor “foot much of the bill for credit card points, miles, and cash back.”
“Every time a credit card is swiped, the bank charges a fee. It seems trivial, but those fees add up — enough to help pay for rewards like points-funded hotel rooms and cash back.
To compensate, businesses raise prices, and so cash users (who tend to be poorer) are often subsidizing the perks going to credit card users (who tend to be richer).
And the higher the rewards, the higher the cost to the unsuspecting people paying for it.”
Aaron Klein, a senior fellow in economic studies at the Brookings Institution who has studied and written extensively about credit cards and the poor, told Vox, “The American payment system has evolved into a reverse Robin Hood whereby middle-class and working-class Americans who pay with a debit card, prepaid card, or cash are subsidizing the wealthy, who pay less for everything.”
Credit card companies make money in three main ways:
- Annual fees to have the card.
- Penalties on late payments and interest on unpaid credit card bills.
- Interchange fees, which are small increments charged to users every time they swipe, plus a small fixed fee. Generally, credit card companies charge about 1 to 3 percent of the total transaction amount.
The final bullet point is a big moneymaker for companies.
“The interchange is a steady, almost annuity kind of revenue stream,” Ted Rossman, senior industry analyst at Bankrate and CreditCards.com, told Vox. Rossman estimates swipe fees “currently average about 2.3 percent, and the more elaborate the rewards card, the higher the fees.”
“Part of the money that banks get from interchange fees goes back to their customers in the form of rewards, explains Vox.
Unfortunately for the lower class, credit cards aren’t the only place where the deck is stacked against them.
“There are all sorts of places where it’s more expensive to have less access to financial services. During the pandemic, people without bank accounts often wound up being charged to cash their stimulus checks, losing out on money they were entitled to.
For many people without credit cards, the problem isn’t that they don’t want one, it’s that they can’t get one because their credit score is too low or they don’t have enough of a credit history to get approved. It’s harder for the unbanked to build up savings, get traditional loans, or pay basic bills.
And so they wind up losing money — they turn to expensive payday lenders that charge exorbitant interest rates and risk getting pulled into debt traps or resort to financial products that charge them more specifically because they have less.
Rich people reap most of the benefits of the stock market’s rise, a rise that’s fueled by the productivity of workers.”
Emily Stewart, the author of the Vox article, sums it up perfectly at the conclusion of the article.
“It’s expensive to be poor in America. And when it comes to rewards cards, it’s expensive to the benefit of the rich.”