Poor Americans subsidize credit card rewards

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Consumer watchdog groups have long asserted that the fees levied by credit card companies drive up retail prices for all consumers, which means cash-payers shoulder the burden whenever someone whips out the plastic. Now, a new report from the Boston Federal Reserve not only validates this hunch but goes a step further: Since card companies charge merchants more to process reward credit cards (such as those which give airline miles or hotel points for each purchase), those rewards are essentially subsidized by cash-paying, often lower-income consumers.

The report reads, "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." That's a tremendous disparity, and further research showed that the ones bearing the brunt of this inequality are the poorest Americans. When the study looked both at the methods of payment used and the household income of customers, it found that the poorest Americans -- those who live in households with annual incomes of $20,000 or less -- pay an average of $23 per year. While this might not sound like a lot, look at the flip side. Americans who make $150,000 or more actually get $756 a year.

"The Boston Fed provides empirical support for what I always knew, which is that we all pay more due to unfair interchange fees," Ed Mierzwinski, consumer program director for watchdog group U.S. PIRG, told WalletPop in a phone interview. "It confirms that cash customers, who presumably [have] much lower incomes, pay more."

Card companies charge different amounts for processing different types of cards, with rewards card commanding a premium. (That's why they try so hard to get you to use your reward cards; not only do they get to charge you interest on the balance, but they get to charge merchants a premium every time you use them.)

Previously, credit card companies had forbade stores from offering discounts to cash-paying customers or requiring minimum purchase amounts for the use of a credit card. Recent changes to the law (which we told you about here) prohibit card processors from including rules like this in their contracts with retailers, effectively allowing merchants to offer discounts to customers willing to pay cash and impose minimum charges on credit card users.

Mierzwinski says this will go a long way towards rectifying the imbalance outlined in the Boston Fed study. "It's not going to solve everything," he says, "but it's going to take major steps towards it."
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