Credit Cards Transfer Wealth from Poor to Rich? Gimme a Break!

by Darwin on July 28, 2010

There’s a story out this week (here) postulating that the poor are funding credit card fees while the rich reap the rewards.  This alleged injustice is two-fold: 1) the poor tend to pay cash for items more-so than the rich and since transaction fees are passed on to all consumers, it’s the poor that are disproportionately affected with bankruptcy and lifetime debt slavery, and 2) the poor don’t tend to get the benefit of the rewards programs the rich do.


First off, let me start with the basic mantra – correlation is not causation.  Just because two items are correlated, that does not necessarily mean that one causes the other.  Just like I might say all basketballs are orange, that doesn’t necessarily mean that all orange balls are basketballs.  So, because poor people tend to pay more into the credit card system and wealthy people tend to take more out of the system in the form of rewards, etc., that does not necessarily mean that this is some sort of unfair redistribution of wealth that is “forced” upon the poor.  For instance, I know plenty of wealthy people who overspend and pay fees and interest on their credit cards and there are also people of modest incomes who use a credit card but never make a late payment for fear of the economic damage they can wreak – and there’s nothing preventing them from having a cash back card comparison tool just like I do.  So, just because you’re poor, that doesn’t mean you are forced to be paying exorbitantly into the system.  There are many reasons why people are poor, and often times it’s more related to the cards they were dealt than anything else, but sure, some people are poor BECAUSE of their spending habits! So, the cause was personal behavior, not economic status.

Now, that’s oversimplifying, but making some points.  To point out how misleading this suggestion is though, consider other circumstances where the poor are disproportionately affected and then ask yourself if the argument makes sense:

The Poor and Gambling:

Since the poor spend almost ten percent of their income on lottery tickets (scary – source), and these ticket proceeds go into the state coffers, the poor are paying for services the wealthy enjoy in the form of state tax expenditures.

Would this argument make sense to you? Do you feel guilty every time you drive on a state highway or go to a state park?  Should you?  Do you feel like you owe the poor back for their generosity in disproportionately funding what you’re enjoying?  Somehow I doubt it.  Again, part of the reason many people are poor to begin with is their spending habits.  Of course, much else is involved, including the fact that many didn’t get the same start in life that perhaps you and I did.  But to argue that the poor are funding the rich via lottery tickets would mean what – we should subsidize their lottery ticket purchases?

The Poor and Cigarettes:

It’s been well-known for years that the poor are disproportionately affected by tax hikes on cigarettes (source) but because smokers are politically unpopular (both rich and poor), these tax hikes usually make for an easy money grab by politicians to blow on unrelated services and giveaways.  While the data would support that people who don’t stop smoking are impacted financially by such hikes, would one make the leap that the poor are helping the rich by smoking?

The thing to keep in mind in the arguments is, what is the aggregate story here?  47% of Americans don’t pay any federal income tax whatsoever and the poor generally don’t pay any state income tax and receive benefits the rich don’t.  Even in the context of some of these alleged backward flowing benefits, is it worth upending a private sector financial flow to advance some sort of social justice that is really more based in behavior than it is economic status?

The most laughable part of the study is the recommendation: Reduce card rewards and merchant fees…perhaps government should regulate how rewards are administered.  Because after all, that, like virtually everything else the current administration has done – would reward the irresponsible while punishing the responsible.  Anyway, I’m a huge fan of cash-back credit cards here in the US.  And This site in the UK lists credit cards available including reward and cashback credit cards there.

{ 9 comments… read them below or add one }

Investor Junkie July 28, 2010 at 11:07 pm
Darwin July 28, 2010 at 11:34 pm

Ha! I had it drafted yesterday but posted another one instead, you know, can’t violate that 2 post in a day rule. But similarities? Nah. I rant about the same stuff here weekly. Hope you likey!


Financial Samurai July 29, 2010 at 2:16 am

I think u guys are having a Bro-mance moment.


Evan July 29, 2010 at 10:57 am

Its cute isn’t it, Sam?

I love the basketball causation analogy


S.P July 29, 2010 at 2:20 pm

I would agree that poor vs rich argument is not really good, but cigarettes and gambling are not good counter-arguments in my opinion because they are not being imposed on. you don’t have to smoke or gamble, but you can’t really have access to those high rewarding cards for big spenders.

I think the real argument, while a bit off-topic, would be that the credit card users are really robbing blind those who do not use them. Merchants pay what, 2-3% per purchase? Since they aren’t taking that from profit and simply putting it as higher costs, they charge it as well in their prices, thus making people not using credit cards losing money by not using that service. That’s not even the reward points part.

With the reward part, the merchants have to pay for those rewards one way or the other, from higher credit card use to sometimes having to directly make a deal with those credit cards.

Not sure if it is law everywhere, but merchants are not allowed to charge more if you pay by credit card. So instead, the trend is that they are offering discount if you pay cash. I think that’s a great way to promote the use of good old cash, and it would end the poor vs rich argument on credit card use, valid or not.


Kasey August 2, 2010 at 4:27 pm

Way to add some balance to a poorly conducted study. Responsible spending and personal finance knowledge are a big issue in America. Not just with the poor, but the middle-class and the “we-look-rich-but-we-have-tons-of debt” people.


Carl Peterson January 16, 2011 at 2:24 am

Your summary of the study in points one and two is factual but you then go on to talk about something else entirely without addressing points one and two.
1) The poor pay for more in cash and merchant fees are included in the prices they pay.
2) Since they are paying in cash, they are obviously not getting reward points, cash back, etc for their purchases.

What was the point of writing this in response to a study if your not going to address anything in the study?


Darwin January 16, 2011 at 10:12 am

The point is:
– This is not forced upon them. Virtually anyone can get a credit card.
– The “solutions” recommended in the study were complete nonsense – more government intervention and punishment of responsible behavior.


CatZ March 22, 2012 at 4:03 pm

“Merchants pay what, 2-3% per purchase? Since they aren’t taking that from profit and simply putting it as higher costs” no, merchants aren’t allowed by law to do that and marking up items makes the small business even less competitive. ” the trend is that they are offering discount if you pay cash”…A discount on an already extremely small profit that’s barely enough to sustain the business??? The fees add up to a lot more tha 2%. The mark up on items isn’t nearly as high at it used to be because of internet high volume sales. In my business, my markup can be as small as 20% and sometimes much less than that. The percent that I am charged when someone uses a card in my store is 3% OF THE ENTIRE SALE INCLUDING THE TAX, NOT INCLUDING THE SWIPE FEE. A rewards card takes 5% of the total sale. If I only make a $2 profit on a 10.00 item, and most of my sales are that small, they take 21 cents to swipe, 50 cents of the sale including the tax = 71cents. Doesn’t sound like much does it??? But that is nearly 40% of my slim profit, and that doesn’t include monthly billing fees. If I lose that much profit from most every sale I make……I’m out of business. That’s how the big banks with all the money are killing the small business.


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