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Credit cards acting as reverse Robin Hood?

By Leslie McFadden ·
Thursday, July 29, 2010
Posted: 2 pm ET

Do you use rewards credit cards for every purchase you make? A new study from the Federal Reserve Bank of Boston might make you feel a tad guilty about doing so.

The report authors contend that using credit cards as payment generates "a nontrivial transfer of income from cash to card payers" and from the poor to the wealthy because retailers don't generally set different prices based on the form of payment. "Cash" includes all forms of payment except for credit cards.

Credit card companies forbid retailers from passing the fees associated with credit card payments --which average around 2 percent according to the National Retail Federation -- directly to cardholders through a minimum purchase requirement or surcharge on credit card purchases. Rather, the researchers write, "merchants mark up their retail prices for all consumers by enough to recoup the merchant fees from credit card sales."

How cash payers and low-income folks get penalized

Because these fees help to fund credit card rewards programs and cash users pay those fees through higher retail prices, cash payers partly finance the rewards that others enjoy. The report also notes that credit card spending and rewards are positively correlated with income, which means that poorer consumers are subsidizing wealthier households.

"On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year," the authors state.

The report goes on to suggest that lowering merchant fees and card rewards "would likely increase consumer welfare."

Will interchange reform really help?

The new financial reform law calls on the Federal Reserve to set standards for "reasonable and proportional" interchange fees for debit card transactions, will permit credit card minimums of $10 or less and allow merchants to offer discounts for preferred payment methods, such as cash or debit cards instead of credit cards.

Yet it remains to be seen whether consumers -- as cash or credit card payers -- will see a real benefit from interchange fee reforms that clearly favor merchants. Nothing in the new law requires merchants to lower their prices or provide discounts for using cheaper forms of payment. Lower retail prices didn't result from reduced interchange fees in Australia, according to a November 2009 report from the U.S. Government Accountability Office. Instead, issuers pared back rewards programs and increased annual fees.

What are your thoughts on the subject? Is the sharing of credit card costs through inflated prices justified since many people use credit cards, or do you think that cash payers and lower-income folks are being unfairly penalized?

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July 30, 2010 at 8:59 pm

I use reward credit and debit cards almost exclusively, and feel no guilt whatsoever concerning those who don't. There are many who use cards that provide no reward, and many who could use reward cards but opt for cash. And while the gist of the article was that the poor are funding my rewards, my taxes are funding food stamps, WIC, and Medicaid. Meanwhile, the government is practically giving money to the banks for free, so my rewards have to make up for some of the interest I used to be able to earn. Guilty? Hardly . . .

Debra James
July 30, 2010 at 12:25 pm

I think you believe that you are giving sage advice, albeit in a round about way. However, I do think that your intentions will be negated if you continue to imply that people are not smart, and that you are smarter than them. I clearly stated why I use my credit cards, and rewards was only one of the reasons. Are you sure that you didn't forget to put "As" in front of your last initial?

Now if you are speaking from personal experience about getting yourself into extended credit card debt then share that story, but I believe you shouldn't generalize and say things like "always" when referring to people you don't know, because you have no way to substantiate your claim.

Smart S.
July 30, 2010 at 10:22 am

With credit cards on hand, no matter how disciplined or savvy an individual is, they will always get themselves back into temp or long term credit card debt. A debt that is by no means worth any rewards these credit card companies offers. If you’re smart you'll learn to forgo these rewards and live without credit dependence.

Debra James
July 29, 2010 at 5:53 pm

I use credit cards for everything, because of the convenience and to get rewards. When small merchants start offering a discount that is greater than my reward by paying with cash, then I'll go that route. As I said in another Bankrate blog, the cash discount will mostly help small brick & mortar merchants like coffee shops, sandwich shops, drug stores, dry cleaners, hair salons, restaurants, etc.

However, since I buy a lot of stuff online, I will still use credit cards for those purchases and for large-ticket items in my local stores. So these merchants are not as likely to offer cash discounts.

Unfortunately, cash still doesn't provide the 60-day price guarantee or extended warranty like my credit cards do. Nor does cash give me the same amount of power if I have a dispute about a transaction with a merchant. I can't call my bank, and ask them to process a cash-back like I can request a charge-back with my credit card company. So, I'll probably only use cash when I am paying for a service or goods that will be consumed almost immediately.