A new report from an economist says that middle and working individuals and families receive fewer benefits from credit cards than wealthier classes due to the way they each spend. Not all economists agree, however.
A news release on the report from economist Alexei Alexandrov stated that “top earners net about $100 annually in credit card rewards after fees, while the bottom 80% pay $300 to $500 more in fees than they receive in rewards.”
Alexandrov told The Center Square that merchants “likely” build credit card processing fees into consumer’s prices, meaning people would pay a fee whether they use a credit card or not.
Thus, the benefits one will or will not receive from credit cards depends on whether an individual pays with cash or credit.
“The higher-income households are more likely to use credit cards to pay for everyday purchases, and end up getting much of this money back in credit card rewards,” Alexandrov told The Center Square.
“The lower-income and lower-savings households tend to use debit cards and cash to pay for everyday purchases, and therefore pay higher prices at the register (subsidizing credit card rewards for others), without getting rewards themselves,” Alexandrov said.
Alexandrov, therefore, sees payment methods as split down class lines, making for “fee inequity,” as stated in the report, since wealthier individuals put in more money and receive more back and the middle class puts in less money and receive less back – while everyone still pays card fees.
Alexandrov told The Center Square he believes “while credit cards try to be a universal payment and credit method for everyone, they are actually not working particularly well for anyone.”
“On the one side, you have people who do not pay their credit card bill in full each month, with balances lingering for years at high interest rates, who tend to pay with debit cards and cash for everyday purchases (missing out on credit card rewards), and who also end up paying various bank fees more frequently (overdrafts and late credit card payments),” Alexandrov said.
“On the other side, you have people who use credit cards for everyday purchases (getting all the rewards),” Alexandrov said.
“But these are the people who don’t really need the CREDIT part of the credit card, since they tend to pay off their balances in full each month,” Alexandrov said.
Economist E.J. Antoni sees the issue differently.
Antoni told The Center Square that “just because someone has low income or high income doesn’t mean they’re managing their finances well.”
The size of one’s income doesn’t affect one’s ability to budget or plan, Antoni said.
“It’s not quite so black and white as ‘people with low incomes automatically are getting themselves into mountains of credit card debt,’” Antoni said. “There are plenty of people with high incomes who fall into the same trap.”
Credit card companies count on all users, be they rich or poor, “eventually falling behind” and “carrying a balance from month to month,” Antoni said.
“The whole reason they run rewards programs is to entice you to spend,” Antoni said.
Antoni also warned of credit card fee caps.
Putting a cap on credit card fees essentially “limit[s] who can … get credit cards” to “only those with impeccable credit scores,” Antoni said.
However, credit cards are the best option for those in need of such a method, Antoni said, with other options such as payday loans are much less favorable.
Additionally, according to Antoni, if credit card companies are told they can only charge certain fees, the loss will be made up elsewhere, such as in ending rewards programs or – primarily – in higher interest rates.
Policy solutions proposed by Alexandrov in the release to counter “fee inequity” include promoting buy-now-pay-later programs, teaching high schoolers about financial education related to fees and credit, encouraging “merchant discounts for debit or cash payments,” and encouraging “competition from fintech firms and alternative banking models.”
