My inner-Republican and inner-Democrat have another chat
RL : Got another compliment on the credit card recently.
DL : Oh yeah?
RL : Yep. The one where you can upload photos. I’ve got that b&w picture of ComplyKated playing the guitar on the back deck. Get lots of compliments on the picture
DL : Isn’t that a reward card? Like in the commercials?
RL : Yes. It’s the equivalent of 2% of purchases towards future travel expenses.
DL : And you’ve used your reward card before?
RL : Different card, but yes, ComplyKated and I used accumulated rewards to go to Prince Edward Island and Ireland. Planning another trip too.
DL : Did you read that report posted on the Federal Reserve of Boston’s site about reward cards?
RL : I thought about it, but then I saw their statistical formulas on page 40 or so and I got glassy-eyed and quit.
DL : Well I read nearly all of it. What did you think of this?
Because merchants pass credit card processing fees to all customers, regardless of payment method, cash-only households pay more per item and card-using homes benefit through rewards. Furthermore, since card use correlates with class, poor households end up “paying” wealthier households. From the study:
On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $21 and the highest-income household ($150,000 or more annually) receives $750 every year.
RL : Well what about the studies that show that credit card users overspend compared to cash-only customers?
DL : I’m sure that’s true, but that only helps the merchants. All customers are charged the same.
RL : That doesn’t seem fair. Why don’t merchants charge different prices based on payment methods?
DL : Because most CC companies have a No Surcharge Rule in their contract with the merchants (NSR in the study). Those that don’t are reluctant to offer cash-discounts.
RL : Bummer.
DL : So don’t you feel guilty about that? The fact that you use a card nearly all the time costs all consumers – and a disproportionate number of lower-income households – money so you can get rewards?
RL : Well there are other advantages besides rewards: convenience, record-keeping, there’s no cute picture of my wife on the cash…plus that’s how The Game is played. It’s how the system works. Should I switch to being a cash-only customer and suffer financially – to the tune of $1,282/yr on average – out of a sense of solidarity with the lower classes or because The Game is skewed?
DL : I don’t know that I would call that a working system.
RL : Don’t hate the payer, hate The Game. Should we have no cards at all? What’s stopping everyone from using them?
DL : You were proud of that line, weren’t you? I don’t know. Perhaps personal responsibility? They don’t like the idea of everyone paying payment fees just so banks can get rich? Poor credit access to lower classes?
RL : I mean, if there were no NSRs and different prices based on payment methods, I would seriously consider going cash-only. It wouldn’t be worth the rewards.
DL : So you would actively oppose the enforcement of NSRs but keep using your card?
RL : For that kind of money? You betcha. Unfortunately, there are studies that suggest eliminating NSRs wouldn’t be incentive enough to offer different prices. CC users might still pay more to make the equal payments worth it.
DL : It just seems wrong. There ought to be a better way. It’s exploiting people.
RL : Yes, but people who have a choice in the matter. I agree it’s not ideal, but it’s not like we’re doing something illegal or going through a loophole or anything.
DL : There you go with personal responsibility again. How do you live with yourself?
RL : It’s hard. I relax by taking vacations subsidized by cash-only customers.
You have to hand it to the big banks. They’ve lulled us into thinking merchants are gouging us, that we have the right to use our credit card with impunity and reap free rewards or cash back.
In reality, we’re transferring the cost of this privilege to anyone paying cash or even using a PIN-verified debit card, which experts say is the least costly method of payment.
“The people to blame are you and I,” says Shane Kash, a barista at Palio Dessert & Espresso House in Portland, which imposes a $5 card minimum. “We allow it to happen.”
To stop it isn’t exactly attractive. Why avoid using a rewards card when it makes complete financial sense to do so, when you actually gain some of that extra money back? I’ll be wrestling with that question myself.