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Published: July 2010

Reward for whom? Credit card rewards cost poor consumers

A report from the Federal Reserve Bank of Boston illustrates how low-income consumers are paying dearly for wealthier consumers rewards cards.

Reward cards are the reverse Robin Hood: taking from the poor to giving to the rich.

A new study from the Federal Reserve Bank of Boston says that poor consumers are absorbing the monetary affect of these cards, effectively subsidizing their use by wealthier consumers. Because of the popularity of rewards cards, stores will often raise their prices to cover the cost of the cards. Poor consumers end up paying for these increases, but without getting any of the rewards.

According to the report, “Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations,” the reward programs create “an implicit money transfer” to credit card users from cash payers, or those who do not use credit cards, because of price increases aimed at mitigating the cost of accepting the cards.

Households making $20,000 a year pay $23 a year for the cards, while high income households making $150,000 a year actually receive a subsidy of $756 each year, the report claims.

Financial regulatory reforms recently signed into law give the Federal Reserve responsibility for regulating fees associated with debit, but not with credit cards.

For more information about the disparity between rich and poor via credit card rewards card, visit the Federal Reserve Bank of Boston

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Banking   ♦   Credit   ♦   Credit Cards   ♦