BUSINESS

Credit Cards Transfer Money From Poor To Rich Households: Study

07/28/2010 08:40 am 08:40:30 | Updated May 25, 2011

Credit cards do more than drain money from your wallet -- they may actually create an "implicit money transfer" from the poor to the rich, according to a new study from the Boston Federal Reserve.

The study, titled "Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations", suggests that, as card use becomes more frequent, merchants have raised their prices to compensate for card-processing charges. (Hat tip to the WSJ)

As a result, the study suggests, the poor -- who usually lack access to reward-paying credit cards -- end up paying more for everyday goods.

Over the last two decades, the paper notes, the percentage of households using credit cards has remained stable at around 75 percent. But total card-spending has jumped from nine percent to 15 percent. The increased use of cards drives up fees paid by merchants, who raise prices to cover the costs of the cards.

As card-using households make more and more purchases with credit cards and jump to take advantage of card rewards programs, "cash-using" households bear the brunt of higher prices without any of the benefits of cards.

Here's more from authors Scott Schuh, Oz Shy and Joana Stavins:

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. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general.

The authors suggest a few approaches policy makers could take to mitigate the damage caused by credit cards, including allowing merchants to adjust prices based on whether a purchase is made by cash or credit, a practice that is currently against the law.

Read the study below:

Credit Cards -

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