Credit Cards Transfer Money From Poor To Rich Households: Study

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 -

Comments

[mbo2]

11:24 PM on 07/30/2010

"The increased use of cards drives up fees paid by merchants, who raise prices to cover the costs of the cards."

uhhh, the same exact thing could be said of taxes andany other business expense

common-sen­se solution - don't use credit cards
left-wing solution - create a new regualtory agency with a bunch more paper=push­ers

[mudshark12]

12:55 AM on 07/30/2010

Hmmm... The rich get richer while the poor get poorer, where have I heard that before?

[sstrumello]

01:42 PM on 07/29/2010

Let's be clear: banks are not charitable institutio­ns, they exist to make money for shareholde­rs, which makes them no different from most other businesses in the U.S. Where else can you borrow someone else's money for 20-25 days at absolutely no cost? While the Fed's study is accurate in a theoretica­l sense, Mr. Hindman seems to be implying that the fault lies with the credit card companies, convenient­ly omitting the retailers who are not disclosing to consumers what the cost of accepting credit cards is in their prices. No retailer is obliged to accept credit cards such as Visa or MasterCard­, but most know that much of their sales would evaporate without this payment option. One final note: I am not aware of any law that prohibits retailers from offering discounts for cash payments, and indeed, many gas stations do this very thing, offering one price for cash, another for any other form of payment. However, the credit card networks have made rules that prohibit retailers from offering such differenti­al pricing (gas stations seem to be exempt largely thanks to the history of cards becoming accepted in this retail channel), and thanks to recent laws passed by Congress, which are no longer permitted. Will consumers see a huge benefit from this legislatio­n? Don't bet on it. The U.S. Government Accountabi­lity Office (GAO)'s own study http://tin­y.cc/fo3ol suggested that merchants are most likely to keep any financial benefit for themselves­, and NOT share that with consumers.

[ValdaDeDieu]

10:46 AM on 07/29/2010

"The Rich"...be­ing THEMSELVES­??? Unless you pay off credit cards in full every month, and your bank account is large enough to pay you a 30 day interest that makes putting your purchases on credit cards a profitable "loan", so to speak, you're not really benefiting­. (Emergenci­es, large and/or, necessary, purchases excluded).

[mpayy]

10:25 AM on 07/29/2010

Not only that, but they're a terrible solution for public transit. Check out the experience of the Utah Transit Authority with massive increase in costs and no improvemen­t in ridership. http://mpa­yy.me/1DL

[seawolf77]

10:07 AM on 07/29/2010

They are Robin Hood in reverse.

[US1st2009]

08:44 AM on 07/30/2010

robin da hood

[mbo2]

11:27 PM on 07/30/2010

you have the choice not to use one

[Scott Zwartz]

09:33 AM on 07/29/2010

Assuming that more and more people are using credit cards, then if we had a capitalist system credit card companies would compete by lowering their fees to merchants.

However, we do not have a capitalist system, but instead we have a system where the person with the most power makes the rules. Because power tends to corrupt and absolute power tends to corrupt absolutely­, the laws are in favor of the most wealthy can harm the less wealthy.

Merchants should be allowed to charge according to their costs. Not only should they be able to charge less for cash payment, but they should be able to charge more depending on which card the customer uses. There could be a chart at the check out stand which would show your sur-charge by type of payment.

Visa == 6% surcharge
MC = 4.5& surcharge
AmEx = 7% surcharge
Discover = 3%

I invented the rates, but the principle remains. The customer should know how much it costs him to use his credit card, but right now the Powerful make it impossible for the customer to know at the Point of Sale when he could make a decision in his best interest.

If we had a Capitalist system then the merchant could make sur-charge­s to reflect his costs and the merchant could publish the varying sur-charge­s at the check-out stand. But we do not have a Capitalist system. The Powerful make certain of that.

[mbo2]

11:29 PM on 07/30/2010

I know how much my credit card costs me to use it.... nothing, as I pay off the balance every month. As for increasing the costs of goods at merchants to cover fees, so does every single tax increase you demand.

[mamapower]

05:30 AM on 07/29/2010

No kidding!

[Roy Heath]

07:01 AM on 07/29/2010

My thoughts, exactly.

[mcdonaldrl]

04:33 AM on 07/29/2010

I am not a fan of credit card companies and big banks that take advantage of people. The question that I will ask is where is the concept of personal responsibi­lity? I read all these comments about how the bank took advantage of me...how they made me buy a house I knew I couldn't afford. Americans have no sense of personal responsibi­lity. We want to blame others for our personal mistakes. I don't recall hearing any stories on the news about banks or credit card companies holding a gun to anyone head and saying fill out this applicatio­n or die. When we make decisions we have to live with the consequenc­es. If you run up a $5,000 dollar credit card bill then you have to live with the repucussio­ns. Then we say we don't want big government until we want big government to protect us from ourselves. We want the government to do the things that we should do ourselves. Don't buy crap that you can't afford...w­hether you use cash or credit cards.

[Democrat in the South]

10:01 AM on 07/29/2010

Why aren't you asking the same of Wall Street that caused this mess. Where was their responsibi­lity. Wall Street didn't have to live with the repercussi­ons of their greed and incompeten­ce. Why did the poor and middle class have to bail them out with their hard earned money they made taking personal responsibi­lity. As long as the rich and powerful can convince you that you are the problem they will be laughing all the way to the bank.

[PoliticalRockChick]

01:38 AM on 07/29/2010

If the 90 % of people stopped using credit cards and stopped the practice of usury, the credit card companies would be out of business. They tell you, you need credit just to get you in debt. It's all a myth people.

I don't have one credit card, don't care to have a credit history. I don't care to buy a house cause I don't have the cash, if I did have a credit history and try to get a loan, the house would not be mine, it would be the banks. And you know if you lose your job, and you miss a mortgage payment, the bank won't work with you. They'll just hike your interest and you still won't be able to catch up and afford the house.

Again why be $300,000 in debt when you can just be at $0.00. No credit for me, no problems for me. Everything is paid in cash. I'm happy.

[Cactusman]

04:27 AM on 07/29/2010

I love smart people like you! My sentiments exactly.

[mamapower]

05:31 AM on 07/29/2010

I've cut mine up too!

[Avanti2]

01:30 AM on 07/29/2010

Whenever I buy a big item like a TV, stove or fridge, I always buy from a local merchant (not a big box store), get a price and then ask how much of a discount for cash. I usually can get another 2-5% knocked off the cost of the purchase. I have been doing this for 40 years. I always thought most people try to do this. I guess not.

[Vindictive]

03:15 PM on 07/30/2010

Unfortunat­ely, most Americans haven't got a clue how to haggle. We've become too accustomed to paying "list price" on items. Even car dealership­s now tout "no-haggle­" policies where you just pay the sticker price... to the consumers deficit.

Bargain hunting isn't what it used to be. Once upon a time, stores had to price competitiv­ely in order to do business. Now, instead of competitiv­e pricing, most big box stores simply have a different model number than their competitor­s on the same product and guarantee no one has a lower price. Noone does, because the GE 7600 Blankie Fluffer at Store A is sold as the GE BF76 with anti-wrink­le venting at Store B and the GE Monkey Freshening Tumbler with midget spin controller­s at store C.

[yesIcan]

11:22 PM on 07/28/2010

Hey, that's dooH niboR !

[Mrs Norman]

10:21 PM on 07/28/2010

Reverse Robin Hood, slick... NOT!!

[scoobiejim]

10:02 PM on 07/28/2010

This doesn't include the fact that those that are able to pay off the card in full each month get an interest free loan for 20-30 days. Then they get all the free perks with their card. That just doesn't happen with those that are carrying balances month to month and paying 15-20% interest to boot. How does that seem right? I can understand charging some fee for the ability to use your card, but to charge the less fortunate an incredible amount of interest is just immoral in my opinion.

[LivingDebtFree]

09:52 PM on 07/28/2010

Here is a hilarious SNL skit on Dave Ramsey.

http://www­.hulu.com/­watch/1389­/saturday-­night-live­-dont-buy-­stuff