Comment by duxup
2 years ago
>This creates in effect a massive money transfer from the poor
I'm always a little confused on exactly HOW this plays out. I could see someone with terrible credit being denied, but most cash back cards I use are hardly gated / limited to "rich folks only".
I feel like the reasons / the way it plays out are more complex than the results. And really if someone is poor, struggling to pay their card, that's a larger issue than the type of card they use.
I'm just not sure reward cards = "This creates in effect a massive money transfer from the poor" as simply as stated.
There was a study by the Federal Reserve that came to the conclusion last year that rewards cards is basically a money transfer of ~$15 billion from poor to rich per year. Discussion on Hacker News about it: https://news.ycombinator.com/item?id=34492502
That is exactly the opposite what the study states. https://www.federalreserve.gov/econres/feds/files/2023007pap...
In the abstract:
> sophisticated individuals profit from reward credit cards at the expense of na¨ıve consumers.
Then in the study:
> Next, we study whether the redistribution across FICO scores is driven by differences in cardholders’ income, suggesting a transfer from poor to rich consumers. Indeed, We adopt the following terminology: “Reward cards” are credit cards that earn either cash back, miles, or points; “classic cards” are credit cards that are do not earn any form of rewards. credit card rewards are often framed as a “reverse Robin Hood” mechanism in which the poor subsidize the rich. Our results, however, show that this explanation is at best incomplete. [...] Thus, high-income consumers with high FICO scores benefit from reward credit cards largely at the expense of high-income consumers with low FICO scores.
The Fed is very careful to differentiate between income and wealth. You can be wealthy with little income and you can have a lot of income but not be wealthy.
While the study points out that high income, high FICO consumers benefit at the expense of high income low FICO consumers, which strictly controls for income as opposed to wealth, ultimately the study concludes what OP said it does, that reward programs transfer wealth from the poor to the rich, and I quote:
>Credit card rewards transfer income from less to more educated, from poorer to richer, and from high- to low minority areas, thereby widening existing spatial disparities.
At the end of the quote you excluded this:
"We find a redistribution from low- to high-FICO consumers regardless of income."
Poor people have low FICO scores. There are also high-income people with poor FICO scores. Both are involved.
"Thus, high-income consumers with high FICO scores benefit from reward credit cards largely at the expense of high-income consumers with low FICO scores."
The high-income people have much more money, thus have more to contribute to the pool of money going to high-income high-FICO people.
But poor people, who already don't have much money, are also contributing to this pool of money going to high-income high FICO people. And more to the point, it impacts poor people much more, because... they're poor.
So it's not completely the opposite, it's just inaccurate. The poor are subsidizing the rich, and the rich are subsidizing the rich. The difference is, there is a much larger effect on the poor, because... they're poor. They have less access to credit and that lack of access affects them more. A small amount of money lost has a larger impact.
In addition to all this, people of color also have lower FICO scores, so not only is it a burden on the poor, it's a burden on people of color (and the young in general). https://finmasters.com/average-credit-score/ https://www.cnbc.com/2021/01/28/black-and-hispanic-americans...
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Also from the abstract: "We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities"
Gotta be honest that I'm not reading 60 pages at this moment.
But that reads like they're talking about the net effect measuring across FICO scores, but it's not clear that they're talking about the overall cause / if this is a case where some of the poor could in fact choose to use these cards.
Being poor is complex, just not having time (two jobs, etc) often means they don't have time for a lot of things, including shopping for credit cards. I wonder if things like THAT are playing a part.
I don't disagree with the math on the end result, I do think the reason is larger than just say rewards cards, and has to be approached careful.
If these 'luxury' credit card companies wanted poor customers, you think they would have found them by now?
I think the Grandfather was making a different point. That because rewards cards = higher interchange fee for the merchant, this results in the merchant increasing fees on everyone (the payment networks prohibit charging a higher fee to only those paying with a credit card).
>>>The money extracted by the credit card companies and Visa causes merchants to raise prices for everyone regardless of whether they have a rewards card or use a credit card at all.
>>>This creates in effect a massive money transfer from the poor, who do not use rewards cards, to the rich consumers who do.
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It plays out this way because anything anyone buys with a credit card, reward card or not, ends up costing 2-3% more than it would otherwise have, because of interchange fees. If you have a rewards card, the CC issuer turns around and gives you, say, half of that back (1% cashback on everything) and keeps the rest. It's kind of like a tax break that you only qualify for if your credit score is above a certain threshold, but you have to pay into regardless of income/credit score.
> ends up costing 2-3% more than it would otherwise
This is a very simplified view. Cash handling is not free. Fraud levels with cash are different. Overall attractiveness of a small but cash-only business is different.
The alternative to credit cards that charge 2-3% fees shouldn't be cash, but rather debit cards with close to zero fees.
Cash handling isn't free, but a digital transfer that doesn't have rewards is obviously cheaper than a credit card.
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There is a reason every concert and sports venue near me has gone cashless. It's not because they enjoy giving away 2-3% of their revenues but rather those places aren't active every evening and tend to turn over employees quickly. Handling cash is expensive and risky in that environment.
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The median credit score for low-income Americans is 658 (US average is 714): https://www.fool.com/the-ascent/research/average-credit-scor...
It looks like a number of decent rewards cards require a credit score over 670.
Poor people, actual poor people who are just scraping by, usually have bad credit and cannot get credit cards.
Poor people can always get credit cards. They get constant offers for them. The catch is that they are terrible cards with fees and insane rates. The credit industry is perfectly happy to let everyone get into massive debit. They'll give them to anyone (https://www.mymoneydesign.com/nine-year-old-daughter-credit-...)
Credit cards for those with subprime credit often do not offer reward gimmicks and may even require a deposit and/or annual fee.
because poor people, typically: - do not quality for high-rewards cards (which have higher credit score thresholds) - if not savvy, carry a balance because they can't afford to pay off the amount in full, are subject to higher interest rates because those are the cards they qualify for, and thereby pay much more than than well off consumers (increasing the transfer of wealth) - if savvy, realize that having a credit card costs them more than not, and stick to cash - are more likely to be receiving payment for services in cash themselves and will just spend that rather than depositing and using a CC (if they even have a bank account)
(update: 4.5% of US households are unbanked; these are mostly from the lower quantile) https://www.fdic.gov/analysis/household-survey/index.html