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CC rewards seem like a indirect regressive tax. Wealthier consumers who can afford to pay on time and have better credit ratings are subsidized by poor consumer
by pradn 6y ago
CC rewards seem like a indirect regressive tax. Wealthier consumers who can afford to pay on time and have better credit ratings are subsidized by poor consumers who actually use the "credit" part of "credit card".
- cpsempek 6y agoI'm ignorant to CC companies' financials. But I would have thought their revenues are driven by transaction fees, which end up ultimately getting passed down to the buyer through higher prices. Would be interested to learn more though about CC economics. It would indeed be sad if CC rewards operated like a regressive tax, as you say.
- sdenton4 6y agoIf you have poor credit, you get a crappy credit card: low limit, high interest rates, no rewards. If you've got great credit, you get a high limit, slightly-less-astronomical rates, and all the rewards. The cost of the rewards is (as I understand it) mainly carried by the transaction fees, spread out over all purchases everywhere. So you have pointless price increases for people who /don't/ use credit cards (like me) or have poor credit, and the benefits of that 'tax' going to users with good credit (ie, rich people). So, yeah, it's a wealth transfer to people with better credit.
- DevKoala 6y agoI had poor credit at a point in time. I "bought" a credit card to build my credit by putting a deposit. After 1 year of on-time payments I was able to graduate to a credit card with cash back. The system didn't feel punitive to me, and honestly, I had poor credit in the first place because I was irresponsible while in college.
- Gaelan 6y agoOf course, the system is designed to encourage you to be irresponsible in college.
- matthewdgreen 6y agoYou just described a scenario in which you were systematically bilked for at least a year —- paying full retail prices, which presumably paid for full transaction fees, which in turn did not pay you any rewards —- so you could graduate to the privilege of being allowed to purchase a consumer line of credit that reduced the level of punishment to something merely appropriate. There are relatively few businesses in the world that can rip someone off for a year, then allow them to pay a more reasonable fee in exchange for guaranteed business, and still have the consumer claim that the system “doesn’t feel punitive.” The whole thing is kind of brilliant.
- ceejayoz 6y agoDiscover has a secured card that earns cash back.
- DevKoala 6y agoIt was a painful year that taught me a lesson. Looking at how fiscally responsible I have become, I really have no complains.
- dingaling 6y agoIt's not financial responsibility or learning lessons, it's the fact that you consider earning cashback to be a reward for the ordeal you endured. By participating in the cashback scheme you're putting more people through that ordeal by means of higher fees. The only way to win is not to play.
- DevKoala 6y agoI don't consider earning cash back to be a reward, but I see the credit card as a product that lends money based on a risk evaluation. At that moment in my life, the risk on lending me money was high and therefore the product I could access was limited. There was little incentive for the bank to risk lending me money, so I needed to purchase my way into rebuilding my credit. As the risk in lending me money decreased, banks became incentivized to offer me lines of credit so the cash backs kicked in. Rebuilding my credit has allowed me to access lower rates on my mortgage , investments loans and other financial tools that have greatly contributed to my quality of life. I would consider that to be the reward.
- PascLeRasc 6y agoIt can get way worse than revenues being driven by interchange fees. Banks like Wells Fargo and Capital One operate like a classy pay-day loan company, targeting sub-prime customers who are more likely to not pay on time. I'd recommend reading this for more info: https://newrepublic.com/article/155212/worked-capital-one-five-years-justified-piling-debt-poor-customers https://newrepublic.com/article/155212/worked-capital-one-fi...
- alt_f4 6y agoIt's not though. No one is forcing you or anyone else to sign up for credit cards - it's a choice, unlike taxation.
- sdenton4 6y agoIt's not optional, though. I still have to pay the higher transaction costs even without a credit card, because the credit card companies require that vendors have the same prices for card or cash, resulting in higher prices for everyone.
- apta 6y agoI've seen stores (e.g. electronic stores) offer reduced prices when paying in cash vs. credit card. Is this law only in the US?
- ceejayoz 6y agoReduced prices for cash used to be against the Visa/MC merchant terms. They lost a lawsuit over it, but it's fairly ingrained by now. You'll see cash discounts at some gas stations, and the occasional small coffee shop or takeout place will have a $10 minimum, but otherwise it's gonna be the same price most places.
- apta 6y agoSeems like an opportunity to raise awareness for this information then.
- alt_f4 6y agoWill you go to jail or pay a fine if you don't use a credit card? No? Then it's nothing like taxation and it is optional.
- sdenton4 6y agoThink of sales tax. You have the option of paying it or not buying things; it's not optional.
- hawkice 6y agoIt's not government. The same incentive structure for businesses matches better to loyalty cards.
- digsy 6y agoAre they? Visa/Mastercard charge merchants 1-2% interchange fees for each transaction. I'd guess that people putting $20k a month on their Visa (I know a few that do) are paying for themselves with the interchange fees.
- ryanwatkins 6y agoThe vast majority of that fee that merchants pay goes to the bank, not Visa or Mastercard. And a vast majority of what the bank gets in that fee goes back out to the card owner in the form of rewards. You see merchant fees of 1-2% because that is pretty close to typical rewards paid out on credit cards.
- notyourwork 6y agoIf people didn't spend money they don't have the problem you describe dissolves. No one has to use credit cards and being financially literate is an individual responsibility.
- dimitrios1 6y agoYou mean to tell me all my woes in life aren't some form or another someone else's fault?
- komali2 6y ago> financially literate is an individual responsibility. Is being able to read and write an "individual responsibility?" How about the ability to communicate in a language at all? What about any other basic core skill that would make a person capable of learning more things to make them "productive?" "Individual responsibility" as it pertains to these topics is at best a misnomer, if it even names an existent thing at all. Surely you don't think it's ok for, say, a Company Town to exist? Can you extrapolate from there why it's not ok for credit card companies to bamboozle less educated Americans for money?
- notyourwork 6y agoI would encourage you to frame your disagreement with statements and facts. Asking questions expecting the reader to draw the same conclusion as you isn't a useful discussion mechanism. Especially when the reader doesn't agree with you.
- komali2 6y agoI'm not sure what the relevant facts would be around an extremely value based argument of who is responsible for educating a society. I guess we could look at the general fact that education is one of the better investments to increase a nation's GDP, bit I'm more concerned with the ethics than the money.
- pirocks 6y agoHere are some facts: https://nces.ed.gov/naal/kf_demographics.asp#3 https://nces.ed.gov/naal/kf_demographics.asp#3 , about 14% of adults in the US in 2003 had little to no reading skills.
- thalesmello 6y agoThere's a bit of misunderstanding in your statement. Most of the money made by companies in payments systems comes from transaction fees, not from interest. When companies offer you better rewards, that's them competing to have you use their credit card rather than the competition's.
- crazygringo 6y agoSorry to tell you but that's not true. Literally the top Google result says the contrary: > "Out of the various fees, interest charges are the primary source of revenue." [1] Yes, credit cards charge a large transaction fee, but wind up refunding a large portion of that back to the consumer in the form of rewards, so these days that's not the main source of profit. [1] https://www.valuepenguin.com/how-do-credit-card-companies-make-money#:~:text=Credit%20card%20companies%20make%20money,interest%20on%20the%20borrowed%20amount https://www.valuepenguin.com/how-do-credit-card-companies-ma....
- pmiller2 6y agoAnd, you would be correct, in a sense. Wealthier consumers benefit disproportionately from CC rewards compared to less wealthy consumers: Paper from 2010 showing this: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1652260 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1652260 News article with a good summary: https://www.reuters.com/article/us-usa-fed-wealthtransfer/credit-card-fees-transfer-wealth-to-rich-study-finds-idUSTRE66P50S20100726 https://www.reuters.com/article/us-usa-fed-wealthtransfer/cr...
- mNovak 6y ago+1 for actually supplying sources! tldr: >> ...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.
- chrischen 6y agoWealthier consumers also have more to gain on the luxury perks offered by cards. If you value 5 star hotel stays and airport first class tickets then you get more of the "value" back from the card fees. But actually with chase you can get a lot of those fees back on non-luxury redemptions too, but you'd still have to be rich enough to travel.
- apta 6y agoThe governments must step in and ban interest altogether. This is only fair, and will force banks and businesses to transact morally with customers.