It’s a Robin Hood style fairy tale, a tale of generous wealth stolen from the rich and thrown to the poor—except it’s exactly the OPPOSITE.
The credit card companies are no Robin Hood. In fact, according to a study released by the Federal Reserve Bank of Boston, they’re using poor people to fund rewards programs they give to their rich folks.
On average, households making less than $20,000 annually pay $21 a year to those households making more than $150,000 annually.
After combining all the rewards benefits, the wealthier parties bring in an extra $750 a year. Not bad, if you make more than 150 grand.
Here’s how it works:
Every time a merchant swipes one of his customer’s credit cards, he pays the credit card company a fee. Although it costs shop keepers more to use credit, they usually don’t price differentiate between non-cash and cash users. Inevitably, the cash-users end up subsidizing the credit-users, as the merchants make their product prices higher to compensate for the fees.
The study finds that on average, the cash-using households pay $149 a year to the card-using households, which over the year receive $1,133 from the cash folk. Since credit card spending and rewards programs correlate with household income, there ends up being a transfer from low-income households to high-income households.
Or, in other words, since poor people use cash they subsidise the rich people’s rewards programs.
On the positive side, especially for the economy, card users spend about 18% more than they would if they were just paying cash, according to a Journal of Experimental Psychology study.