Credit Cards Take From Poor, Give to the Rich

Wall Street Journal ^ | 07/27/2010 | Michael S. Derby

[SeekAndFind]

Credit cards appear to be the reverse Robin Hoods of the financial world.

A new paper from the Federal Reserve Bank of Boston says merchant fees and reward programs offered by many credit-card issuers essentially take money from those who have the least and give it to those who have the most. The imbalance may have to be remedied via government intervention, the authors, Scott Schuh, Oz Shy and Joana Stavins, argued. The paper was published as part of the bank’s Public Policy Discussion Papers on Monday.

It comes amid big changes for the financial industry, as the nation’s bank regulators look to implement newly passed oversight overhaul legislation, some of which is aimed at protecting consumers from unfair credit-card practices.

The paper said that on average, households that use cash for purchases give $151 to those households that use credit cards annually. Meanwhile, card-using households get $1,482 from those who pay cash. The paper calls this a “regressive transfer” of wealth. At the heart of the issue is a lack of knowledge.

“The typical consumer is largely unaware of the full ramifications of paying for goods and services by credit card,” and is unaware how the fees merchants pay to offer payment by credit affects the setting of overall prices, the paper said.

While this system offers flexibility and options for card users, it simply raises prices for those who pay cash. The paper notes that while the percentage of households using credit cards has been relatively steady at around 75%, total consumer spending via cards has risen from 9% to 15% over the last two decades, increasing merchant fees.

Distortion of prices due to things like merchant fees is further exacerbated by the reward programs that are usually only available to those who spend more via credit cards

[Lonesome in Massachussets]

Burned up my credit cards for fuel.

I just pay mine off every month and get free stuff back. When I and Mrs. Lonesome took a cruise, I paid with Discover and the kick back from Discover was worth more than a $50 gift card from Kohl's (where Mrs. shops anyway). If I hadda pay interest on the credit card, I would have have paid cash or check instead.

Thanks for the dough, suckers.

Basically, "finacial reform" is a wealth transfer from the frugal and careful to the clueless and improvident.

[CodeToad]

The poor use coupons, get free toys in their Happy Meals, and...of, well, the poor are stupid and the ability to think a company giving incentives to use their products is a scheme for the rich just proves it.

[Da Coyote]

Government correction of the problem?

Is that the government containing Charlie Rangle, Barney Fwank, Chris Dodd and the rest of the folks who couldn’t pass an Econ 101 course and all of whom should be in jail?

[Jack Hammer]

‘The imbalance may have to be remedied via government intervention, the authors, Scott Schuh, Oz Shy and Joana Stavins, argued.’

Seems to be the solution for everything these days. The very dictionary definition of socialism.

[eclecticEel]

Heaven forbid anyone be rewarded for acting responsibly.

[Niteranger68]

Actually, I have judiciously used my credit cards for somewhat long term loans with interest rates averaging 1.9%. Seemed like a good deal to me.

Agreed! That's a smokin' good rate! My only fear with financing something on a CC with that low of a rate is the rate changing.

[Myrddin]

Cancel the cards. This is just a rehash of the "I'm too stupid to read the contract" approach to financial irresponsibility. Miss 2 consecutive payments...cancel. No more access to credit for the irresponsible and uncreditworthy.