Dirty little secret of credit card rewards

[Coventina]

There’s a feeling of excitement when you turn your daily credit card swipes at Starbucks into first-class airfare or a jaunt to Costa Rica. Thanks to mobile banking and the ease of autopay, you can scrupulously avoid any additional costs by paying your monthly bill in full. Free flights and exclusive discounts abound. Something for nothing, right? Not exactly. Credit card perks for educated, usually urban professionals are being subsidized by people who have less. In other words, when you book a hotel room or enjoy entry to an airport lounge at no cost, poor consumers are ultimately footing the bill.

Demand for rewards is only going up. In 2016, Chase launched its Sapphire Reserve card. The card comes with perks, bonuses and points multipliers that for big-spending travelers and diners are worth far more than its steep $550 annual fee. There was so much initial demand that Chase ran out of the metal slabs it prints the cards on. Sapphire’s enormous success set off a credit card perks war, with numerous banks flooding the market with sign-on bonuses worth thousands of dollars.

In 2022, the Federal Reserve published data showing that the cost of rewards, as a share of total transaction volume on credit cards, increased 25 percent from 2015 through 2021. This bonanza has helped affluent professionals flood Instagram with envy-inducing shots of white sand beaches, hotel suites and plush airport lounges.

But these high-income travelers are also less likely to carry balances that incur interest charges and late fees, which traditionally increase profits for card issuers. So, to offset the cost of paying lavish rewards to these consumers, banks have sought to maximize other usage-based revenues. Enter interchange fees, or the money it costs merchants to accept noncash payments.
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https://www.dtnext.in/edit/2023/03/07/someone-s-got-to-pay-dirty-little-secret-of-credit-card-rewards

(Originally from the NYT)

Not sure how I feel about this. Is it really the fault of someone using these perks that banks gouge the poor?
Maybe the answer is to have bank regulation that doesn't allow them to gouge the poor?
If they then stop the high-end perks, so be it, but the "blame the consumer" model doesn't really work for me.

[calguy]

1. If you don't want to incur high interest rates and fees

All you have to do is not spend more than you have, and pay that bill in full every month.

Call me insensitive, but I have little pity for those who run up substantial credit card debt and then expect sympathy because of the high fees they're paying.

[True Blue American]

3. Never buy on a credit card

Unless you have the money to pay it off. I did not even like having a house mortgage, but at that time had no choice.

[Happy Hoosier]

13. "Never" is a strong word

Sure, being in debt sucks. But sometimes it's necessary. I had a series of disasters occur over the last few years and I had to rack up some credit card debt to get through. Does it suck? But it absolutely beat the alternative.

I'd amend your recommendation to "don't depend on credit cards to maintain your lifestyle on an on-going basis."

[WheelWalker]

20. My dad told me to never borrow money without a way to pay it back.

"Credit is for people who don't need it" he said. He and mom married in 1933.

[wryter2000]

37. That's nice if you can pay your rent

And keep the lights on and feed your children

[moonscape]

45. A mortgage is super smart financially. It's using

debt for an appreciating asset and you come out way ahead in the long run with a mortgage. Mine is almost paid off, but I’m 72 and it’s time. Never could have bought my place had I not parlayed consecutive appreciating residences.

That said, I’m with you on hating debt. Never had a car loan (just cash clu kers until I could afford a better one for cash) and always paid off credit cards in full each month. When I had no money, just ate beans and rice and charged nothing.

[friend of a friend]

4. Sometimes people don't have a real choice.

Medications are one example.

[Kennah]

5. Between my FSA and CareCredit, that's how I get our family meds

[friend of a friend]

6. And it doesn't cost anything?

[Kennah]

7. It's different

On the FSA, it's a payroll deduction every paycheck throughout the year, but I get all of the money available on a credit card from the FSA company. Something of a zero interest loan.

CareCredit is a normal credit card, but used only for medical stuff. Our vet takes it. I think anything over $200 gets a 6 months, same as cash, payoff option.

[haele]

9. FSA is taken out pre-tax, care credit is a tax-deductible medical services loan.

But not everyone has access to an FSA - which has a set limit that does not meet even a third of the deductible on most Health plans - nor have sufficient income to apply for Care Credit if there are major or chronic health or dental concerns. Especially if someone is stuck with a $2k a month biologic medication...
Credit Cards are too often the only Emergency fund available.

Haele

[Ms. Toad]

18. It generally has to be part of your work benefits package.

There are variations (HSA, FSA, and maybe a few others). The one I had was a bit of a gamble. I got it all up front, but anything I didn't spend by the end of the year went back to the company. So I couldn't use it for all of my needs, since I had to put in only the amount I knew for sure I would spend. Some varieties roll over and you keep the money you don't spend (and ultimately earn interest on it, I believe).

But - like 401K plans, the employer generally has to sponsor them. The good news, though, is that a lot do. Starbucks, Amazon, and (before it went bankrupt) EarthFare all did for even entry level jobs - my daughter has $200,000 in medical expenses, and these accounts are how she meets her out of pocket costs (which run into the thousands, and which she hits the first month of each year).

[hippywife]

11. Many people have no other way...

to make ends meet month to month, so yes, I'm going to call you insensitive and ignorant of the facts of how people live and what they need to do to get by. It's not like they're blowing money on luxury goods, unless you consider gas, groceries and meds luxuries.

[calguy]

17. I'll accept you calling me insensitive

But I am in no way ignorant of the facts. I grew up dirt poor, so I know what it's like.

[True Blue American]

27. I would not say

I was dirt poor, because I had a Mother and Father who worked hard, but I do know the value of a dollar. I also know there are times you only have yourself to depend on.

I understand that many have circumstances, illness, death can alter lives. I know from personal experience. Been down to my last dollar. Know you do without when you need to. I can stretch a dollar, never buy unless it is on sale.

I still hate debt!

[hippywife]

29. So why then...

are you punching down on people who are poor now? It's one thing for people to live willie nillie on credit, it's entirely another to have to rely on it to survive.

When we got married, we decided no credit cards and stuck to that, even though we've never been very financially secure. We were fortunate in that we didn't have kids. Not everyone is so fortunate and are looking for ways to keep their kids from having to suffer the indignities of poverty and hunger, even if it's not advisable to do it in that manner. But, ya know, people panic and do what they feel they need to to survive.

[calguy]

48. Sorry, I'm not punching down on poor people

I'm simply saying that most credit card debt is caused by spending beyond one's means. Of course there are circumstances where it is temporarily unavoidable, but for the vast majority, I would say that this is not the case.

[Coventina]

49. Credit cards were essential for me as a young adult.

Graduating college, I landed a job at a very conservative firm.

I had to buy an entire "work wardrobe" with no money.

I had no credit.

Thank the gods I was able to open a department store card (Thank you Dillard's!) and get what I needed.
I also needed credit to buy a car so I could get to work (buses in Phoenix were a joke in the 80s).
(No, I didn't buy a car with my credit card, but the credit record helped me get the loan).

Credit cards enabled me to establish myself as an adult. My parents were NOT in a position to help me.

It sounds crazy, but I wouldn't be where I am today without the credit industry.

Is it predatory? Hell yes.
It needs more regulation!
But, until a more evolved society comes, they are a necessary evil.

[calguy]

50. Congratulations!

[True Blue American]

64. You used credit wisely.

Use credit to establish a credit score. Do not over spend but understand many people have emergencies they can not control. I am one of them. But the life long habit of bargain hunting, then when you can afford it investing helps a great deal.

[Zeitghost]

56. It's impossible

For someone to survive month to month on credit cards, long term, which to me is implied by the use of the term month to month. You can do it for a bit to get out of a short term, unexpected, jam, but you better have a damn good plan to pay it off or you're going to get yourself into a worse situation. I had a dear friend try; she had great credit, an impeccable payment history and limits that normally would not be given to someone making ~45K. To her credit, she was able to juggle the balances and payments for quite a long time, but eventually the minimum payments were eating up her most of her paycheck and she maxed out her generous limits.

Anyone in such a dire financial situation that they "need" credit cards for necessities is not likely to have credit limits beyond a few thousand dollars. So even if they are only increasing the balance by $100 a month, it is going to quickly lead to a situation where they have a significant minimum interest payment and no room left on the cards for those necessities.


In other words, if your month to month survival plan depends on credit cards, you need a new plan.


And plenty of people rack up credit card debt on luxuries/non-essentials. In fact I would guess it's the vast majority.

[jimfields33]

12. I agree. I save for every purchase I get including a roof, painted house, painted driveway

My car, ect. I gave up credit in my 20’s when I got way over my head and my parents had to bail me out. How embarrassing that was. 30 thousand my parents paid off at 26 years old!!!! Pathetic to say the least. I promised then to never get into that again and never did. Lesson learned. My neighbors get free airfare but I don’t care. Good on them. I’ll pay for mine.

[True Blue American]

28. Lesson well learned!

[jimfields33]

52. Thank you!

[Elessar Zappa]

26. Some people use credit cards they can't afford

for life-saving medication. I know someone like that.

[Gaugamela]

32. 60% of Americans live paycheck to paycheck. When an unexpected expense

comes along — medical, auto repair, a layoff, a toxic train derailment that forces you out of your house, etc., — they have little choice but to use their credit cards, if they have them. The problem is 40 years of neoliberal, trickle-down economics that has left the working class broke. It’s the system. The American economy doesn’t work anymore unless you’re in the top 10%.

[ShazzieB]

41. All of this!

What may have worked for some people getting by on a limited income years ago no longer does, because the deck has been stacked against the poor and middle class in ways it dudnt used to be.

It really pains me to see Democrats of all people casting aspersions on EVERYONE who rack up credit debt, as if there is no difference between those who use credit cards irresponsibly to live beyond their means and those who *sometimes* resort to them because they have no other way of handling unexpected expenses. The idea that we can ALL just "save" for every single thing we need is laughable. That may be realistic for some, but it's not and never has been realistic for a lot of people.

I really wish people would stop and think before posting that THEY have always gotten by without credit cards, "so OF COURSE everyone else should be able to do do that, ALWAYS, without exceptions." It's simply not true that "everyone" should always be able to do that, and even worse, it sounds very judgmental and classist as hell. We're Democrats. We should be better than that!

[Oppaloopa]

39. Really? If they have a sick child or there car breaks down Or they are laid off?

[Joinfortmill]

62. I've paid my cc bills in full for decades. There was a time as a young mom that was not possible.

You are fortunate, it seems, that you have never been there.

[SWBTATTReg]

2. All I can say is that someone ends up paying the price, of any of these called rewards. And they're

right, that most affluent people do pay their bills immediately, thus carry no balances etc. that incur monthly fees. I wonder though, if these less then affluent people do even get such cards like this, or if they do, they don't get very high credit limits, etc., thus are unable to really take advantage of these cards anyways. Like you said, the many subsidize the few.

[allegorical oracle]

16. Am not affluent (exist on $11,000/yr), and pay my balances off every month. But I only eat

once a day, do without AC, hand wash dishes, hang out laundry instead of using my dryer. Don't drive more than three times a month unless it's impossible. Basically, I live like my parents did in the 1960s, before dryers, dishwashers and AC was common like it is today. Had to alter those amenities after my husband died. Enables me to afford TV and internet.

[True Blue American]

30. Youu deserve praise for that!

[Zeitghost]

60. There is no subsidizing going on

Last edited Wed Mar 8, 2023, 10:29 PM - Edit history (1)

The people running up balances and paying them off immediately to earn points generate profit through fees.

The people keeping balances to cover emergencies or things they didn't want to save for generate profit through interest.

Both are profitable.

[SWBTATTReg]

66. What fees? I know that the ones I've read about, you have to specifically join, and then you

have to achieve a level of spending at a certain amount, there are no fees in doing so/while you're buying things on your cards, or am I wrong, that is, they do charge a fee to join the program?

[Zeitghost]

67. Credit card companies

Charge merchant fees in the 1%-3% range. So they are still making money on those who do not carry a balance.

[zipplewrath]

8. They'll just gouge the poor more

They offer these high end cards to the affluent, because they will pay for them. They also use them for high dollar purchases for which the cards get those transaction fees from the merchant. Take away that income stream, and they'll go looking to gouge the little guy even more.

The reality is, as you suggest, that regulation be used to ensure that they're not gouging anyone.

[erronis]

34. I'm glad you brought that up. The bankers are using the CC fees (2-3%) to fund their cashflow.

While ripping off the lower-income people with exorbitant interest fees and penalties, most of their steady cash flow comes from the processing fees.

Higher-income people spend a lot more on credit cards and thus bring in more bucks on these fees.

I carry a wad of cash always for most day-to-day purchases. Plus I don't get tracked - unless by the microchips in the $20 bills....

[Initech]

10. I always feel like those ads are misleading.

Like you think you're going to get a trip to the Bahamas, instead you get a discount on a magazine subscription showing pictures of people's trips to the Bahamas. And by the time you spend the money needed for the actual trip, your credit card is maxed out and you're stuck with all that debt.

[Happy Hoosier]

15. Back in the day, the rewards could be pretty good.

During most of the late-90's I traveled pretty frequently for work. I paid for almost all my travel expenses on my own rewards credit card. The balance, of course, was paid promptly after I filed my expense claim, but I got to keep the rewards. I got lots of free airline ticket upgrades, free hotel stays, even free rental car weekends. More than once, my wife and I took a nice little vacation where our only expense was food and entertainment.

But that largely disappeared in the 2K's. The rewards got a LOT stingier. They are barely worth mentioning now.

[Ms. Toad]

19. If you travel at all, they are worth it.

With all of the junk fees added on, flying appears to be one price - but the ultimate fare is often far higher.

Choosing your seat in advance costs money
Being seated next to your travel partner costs money
Bringing on a carry on costs money
Checking a bag costs money.

The latter two generally cost as much as the plane ticket, and can often be avoided by using a credit card associated with a loyalty account.

So it may not be as rewarding as it used to be - but flying isn't as cheap as it used to be either - and having a loyalty-connected credit card can at least take the bite out of being able to arrive at your destination with enough stuff to enjoy it.

[Mosby]

14. Cards w/perks like miles and Disney points

Come with higher transaction fees, paid by the retailer.

[mtngirl47]

31. This! I pay a higher transaction percentage for reward cards

Discover is the worst. Interestingly, I also pay higher fees for prepaid cards.

[Mosby]

55. Discover is the worst in my experience.

Been that way for a long time.

[Justice matters.]

21. Can't gouge me: I pay my bills down to zero (and some to -1 cent to keep them from closing acc).

Once I paid one card, I switch to the other that starts at $0.00 (or -$0.01).

That way, I pay zero interest on all of them and it gives me freedom to pay the other card(s) in full on time each month.

Thanks for the convenient way to pay without contacts for free.

[FakeNoose]

22. I know one thing: the bank executives never have to give up their annual bonuses

... to subsidize the rewards cards benefits.

The rest of us customers subsidize those "rewards", not the bank or its managers.

[hunter]

23. Once upon a time I made the mistake of bringing my credit card with me to the Emergency Room.

I'll never do that again.

That was how I learned the credit card industry is evil and health insurance industry is evil.

Our credit card company "wrote off" about $13,000 in debt, or so they claimed, but most of that was exorbitant late fees and 30% interest.

That's what happens when you can't pay your credit card bills, because duh, you have a serious and potentially fatal illness and miss a lot of work.

The U.S.A. health care system is a cruel joke. Even people with "platinum" insurance and lots of money in the bank frequently suffer absurdly expensive and inappropriate medical care. As a nation our medical stats aren't anything to brag about.

Since then any credit card offers I receive in the mail go directly into the shredder.

[HeartachesNhangovers]

24. BS! I pay off my cards every month and I get cash back,

and the credit card company still makes lots of money off me! How? Transaction fees, which the article doesn't mention in order to try to generate outrage. I spend a lot of money on credit cards & VISA gets a cut of every nickel I spend.

If VISA didn't make money off me, they'd cancel my card.

[Grins]

35. And there it is!

My VISA card was cancelled because I never kept a balance: I PAID it off every month and collected all the points and miles - and they didn’t like that.

[Zeitghost]

58. Millions of people do that

And don't get their cards canceled. The credit card companies love it. There is no risk with that kind of customer and they make an easy 1-3% off of each transaction.

[wryter2000]

38. I put everything on credit cards

I even have a card that pays my rent. I pay everything off at the end of the month. I’m not paying any interest on the cards.

[Earth-shine]

25. They're going to gouge the poor however they can.

Taking away the perks of the better-off CC users will not stop them from leveling the less fortunate.

[Calico79]

33. I use them for the perks

[oldsoftie]

36. I doubt the poor will pay a $550 annual fee.

[IronLionZion]

40. Predatory lenders are the problem, not the people who use rewards

banks love it if people miss a payment and get stuck with late charges, high interest, and other fees. One has to be on top of these things or they will ruin your life.

[yellowdogintexas]

42. I use my rewards cards for different things:

I have a Costco Visa and every Year I get that Costco rebate. We buy gas and certain other items there. Usually pay full balance monthly unless one of us has a big drug bill.

I have had American Airlines Master Cards for a long time (both AA and the former USAir) and my earned miles through travel and the occasional purchase have netted me 6 round trips to Phoenix and 1 to Nashville. I keep the former USAir one for balance transfers if I need one to stay at 0% interest, and use the AA one for purchases over a certain amount, then pay that balance in 2 or 3 at the most installments

I have a Choice Hotel card which is where I stash all my recurring fees like Netflix etc.
I have a ton of hotel points that I save for when we travel.

Amazon Store card - only use it there and pay off to 0 every month. Lots of points which I generally save for Christmas shopping.
Prime Visa: use for some things similarly to the AA and get Amazon points.

There have been dark times in our lives which have required me to run up high balances on these things. Mostly this has been auto repairs, vet bills, dental bills and some medical bills (especially Rx). I have been so grateful that I was able to take advantage of a couple of offers which gave me balance transfers so I could avoid the interest for 15 to 18 months. Those cards never come out of the drawer any more but they are there if I really need to move a balance. If you need to roll a balance to a different card when the time limit is reached, it has to be at a different bank so be sure you have cards from a couple or 3 banks.

My husband's sister ran up a big debt, which was much more damaging to her budget than ours was. I suggested she apply for some cards with an opening reward of 0% balance transfers. She was successful and is paying down her debt for principal only.

[RoadRunner]

43. Subsidize?

This article seems to think that "poor consumers" are somehow subsidizing users of rewards cards. That’s not how it works. Consider what would happen if credit card rewards were suddenly no longer available to anyone. Would the "poor consumers" they write about suddenly be better off, not having to do this terrible subsidizing anymore? No, what they pay in interest, and possibly late fees, would remain the same.

I put everything that’s possible on rewards cards. House insurance, utilities, food, gasoline, pretty much all spending. Hell, I put my mother’s funeral on a cash back rewards card. Banks are still making money from transaction fees, which are almost always higher than the rewards.

[Mosby]

53. The people who sold you gas and lunch

Paid for your frequent flyer miles.

You do understand that transaction fees are paid by businesses, not you or the banks.

[Zeitghost]

59. Very true

And they do so gladly. They take a small hit, but more than make up for it through volume and efficiency. Cash is easy to steal and miscount and has to be counted, stored, and deposited. Credit card payments are much easier to handle and come with less risk.

[WestMichRad]

44. I think some have missed a key point here.

Sure, paying your bill on full helps avoid their exorbitant fees and interest. But the missed point is that credit card companies now charge a fee on every transaction that the retailers have to pay, and of course they pass this on to consumers. Sometimes that comes in the form of easily seen higher prices (e.g. gas stations… discount for cash), sometimes hidden in higher prices on all items. And it’s the poorest folks who are burdened the most by this practice.

So you’re paying for those perks, even if you pay off your balance every month.

[Silent3]

46. Credit card companies have always taken a cut of each sale

What's different is that cut has gone up, along with other fees and penalties.

[oldsoftie]

51. They've charged merchant fees for decades.

[WestMichRad]

63. Maybe so, but I wasn't aware until recently of...

… merchants directly adding a surcharge to customers for who pay with credit cards.

But I live in a dark cave, so I miss things easily.

[oldsoftie]

65. I've seen more "cash price" ads lately too; especially gas stations

We just had remodeling done at our house & we thought we'd picked the contractor until at the very end when we were signing the contract & about to pay the several thousand dollar down payment, they said "Oh, if you're charging it we charge the merchant fee"
Kinda should've STARTED out telling us it was a cash price deal
While I'm one that charges everything to get the "points/miles", I agree with whoever in Congress has submitted the bill saying all businesses must accept CASH. Thats our legal tender. Not everyone a get a credit card. Cash should ALWAYS be accepted.

[mn9driver]

47. The middleman always gets his cut.

Banks used to charge for offering a checking account. Credit cards just shifted who pays. One of the worst things that happened was the repeal of usury laws, allowing interest rates and penalties to become astronomical, which is a much bigger problem for the poor than whether someone else is getting a beach vacation.

[oldsoftie]

54. I charge EVERYTHING. Hotel rooms & plane tickets.

I'd never do it if I couldn't pay it off monthly.
But I'm spending the money anyway I may as well get something. For me, its 2 free Delta tickets every year & at least a few free hotel rooms

[Zeitghost]

57. The article is conflating two largely unrelated parts of the credit card industry

The business model for the 'pay it off every month and earn points' customers depends on a high volume of transactions. So if you're charging a few thousand a month in groceries, gas and reoccurring bills every month but not carrying a balance, the credit card company is making their money on the transaction fees.

The business model is completely different for the 'max it out twice a year to cover an emergency and eventually pay it off' customers. Since they can't depend on fees from regular use of the card, they make their money in interest on carried over balances.


The first model does not depend on the second for subsidizing the points given to customers. They are both profitable in their own right and it's a way for credit card companies to get their products to different segments of the market.

[Joinfortmill]

61. I hear you.