Credit Cards benefiting the rich at the expense of the poor

[Slug]

This new Federal Reserve study is a fascinating look at credit card utilization across income brackets. It's showing up all over the place: NY Times, Wall St. Journal, etc.

It's also an incredible distortion. There are a number of variables for which it fails to account. The most egregious are, "Credit cards allows merchants to do higher volume of sales, which then increases economies of scale, thus making the net affect of credit card use lower prices for all consumers. In addition credit cards reduce transaction error and transaction time, further making it more efficient for a merchant to sell its goods." - Matthew White, WSJ commenter

My favorite quote from the WSJ comment section was this from Dale Evans, "In another report it was revealed that customers that use the restroom at the store benefit at the expense of those who use the restroom at their home. Even more cutting edge research shows that customers that ask lots of questions of the staff at stores increase costs for those who just want to walk in, buy the merchandice and leave. More relavent is the study showing that research by the Fed on how to slice and dice the overhead of companies to validate government control both increases the little people’s taxes and increases the cost structure of our entire economy."

[kork13]

haha I like that second quote. I saw that article on WSJ, and while there is probably some truth that credit card users get added benefit at the expense of cash-payers (or that cash-payers lose out due to credit card users), I don't think it's a valid correlation of rich = credit card users and poor = cash users. Many wealthy families do not use credit cards, and many more poor families do. They stated it themselves -- 75% of families use credit cards. I'm pretty sure well less than 75% of the country would be counted as "wealthy". Sounds to me more like the Fed getting into class-war mongering politics.

[disneysteve]

Originally Posted by kork13

I don't think it's a valid correlation of rich = credit card users and poor = cash users. Many wealthy families do not use credit cards, and many more poor families do. They stated it themselves -- 75% of families use credit cards. I'm pretty sure well less than 75% of the country would be counted as "wealthy".

I wonder, though, what the stats are on responsible use of credit cards. What is the income breakdown for CC users who pay their bill in full each month vs. those who carry a balance? If you are carrying a balance and paying interest, that negates any possible benefit from using the card.

[jIM_Ohio]

One reason the credit card companies need to charge high (10-25% interest rates) is they do not collect on 100% of their liabilities. So that interest rate needs to account for defaults and still operate at a profit margin.

Its the same basic principle as a junk bond fund. Some bonds in the bond fund will default, the goal is for the fund itself to provide a high enough return to account for the defaults.


I had a conversation at lunch one day with someone which worked for the credit cards (he was in my tax class). He told me it was something around 20%-30% planned default I think...

meaning if 10 people each had 10k in balances (100k total liability) and each were charge 20% interest rates (20k charged in interest each year) the company is planning for 20% of that debt to never get repaid.

So they are profiting at 80k of liability and 16k of that interest.


When the government steps in and says "don't charge high interest", its not going to reduce the number of people which default, but it cuts into the profit of the company, and the end result is give fewer people credit. The reason many people have had credit cards cancelled by the card companies is this factor right here.

Even if people pay their bills in full each month, the card companies can really only make a profit if a certain percentage carry a balance, and they know that about 20% of those which carry a balance will default. Having government or anyone step in to tell them who gets credit or how much interest is allowed to be charged means the balance of the system will not be right.


It is not up to me or the government to protect people from their own stupidity.

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.

On average, and after
accounting for rewards paid to households by banks, the lowest-income household ($20,000 or
less annually) pays $23 and the highest-income household ($150,000 or more annually)
receives $756 every year.

here is where I tend to disagree

What most consumers do not know is that their decision to pay by
credit card involves merchant fees, retail price increases, a nontrivial transfer of income from
cash to card payers, and consequently a transfer from low-income to high-income consumers.

the "consequently a transfer from low-income to high-income consumers"- just because I receive points back from my card because I choose to use my card should not be seen as the poor transferring money to the wealthy.

since cash users do not receive
rewards, cash users also nance part of the rewards given to credit card users.

There are two dots there, and I don't think they can be directly or indirectly connected- my rewards should not be seen as the poor transferring money to the wealthy.

On average, each cash buyer pays $151 to card users and each card buyer
receives $1,482 from cash users every year, a total transfer of $1,633 from the average cash
payer to the average card payer.