The ugly truth behind your fancy rewards credit card

“Every time a credit card is swiped, the bank charges a fee. It seems trivial, but those fees add up — enough to help pay for rewards like points-funded hotel rooms and cash back. To compensate, businesses raise prices, and so cash users (who tend to be poorer) are often subsidizing the perks going to credit card users (who tend to be richer). And the higher the rewards, the bigger the cost to the unsuspecting people paying for it.”

“Credit card rewards aren’t generally taxed like regular income, so to a certain extent, they’re even a bigger benefit than they appear on paper.”

“Klein also said that interchange fees that go up with rewards cards can disproportionately impact small businesses compared to large corporations, many of which are often able to negotiate lower fees or strike deals with big credit card companies. According to the Wall Street Journal, Walmart, Costco, and Amazon have all been able to leverage their size and reach to bring down their fees.”  

” not all businesses accept all credit cards, or accept credit cards at all. American Express has the reputation of having high transaction fees that many merchants avoid. And the nice rewards cards often have higher swipe fees than more basic cards issued by the same company. But once a merchant says that they’re going to accept one brand of credit card, whether it’s AmEx or MasterCard or Visa, they can’t really discriminate among the cards under those brands. In 2018, the Supreme Court decided that credit card issuers were allowed to bar businesses from offering consumers incentives to pay with less expensive credit cards. Essentially, if a retailer accepts one type of AmEx, it’s going to accept all of them.
Klein says he thinks if merchants were more easily able to discern which rewards cards to take and which to avoid, some of the poor-to-rich transfer problem could be solved. “A reasonable way for the market to help solve this problem is for the merchants to be able to say, ‘I’m not going to take the Sapphire, the swipe fee is too high,’” he said. “The economist in me is like, the market can correct this to some degree.” 

“Another potential policy fix would be to lower interchange fees, which the Durbin Amendment, part of the 2010 Dodd-Frank bill, did for debit card transactions. If swipe fees for credit cards were capped, rewards would almost certainly diminish, too. But so would the regressive nature of credit card spending.”   

“For many people without credit cards, the problem isn’t that they don’t want one, it’s that they can’t get one because their credit score is too low or they don’t have enough of a credit history to get approved. It’s harder for the unbanked to build up savings, get traditional loans, or pay basic bills. And so they wind up losing money — they turn to expensive payday lenders that charge exorbitant interest rates and risk getting pulled into debt traps or resort to financial products that charge them more specifically because they have less. Rich people reap most of the benefits of the stock market’s rise, a rise that’s fueled by the productivity of workers.

To put it plainly, it’s expensive to be poor in America. And when it comes to rewards cards, it’s expensive to the benefit of the rich.”

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