WSJ Article about Credit Card Rewards

I saw this article from the Wall Street Journal with an interesting FWF perspective about rewards credit cards that never occurred to me. It mentions that rewards credit cards encouraged low credit score holders to spend more and that “high fico score” individuals are effectively subsidized by “low fico score” individuals.

Of course, banks don’t just give these rewards and get nothing in return. When people spend, banks earn swipe fees from merchants known as interchange. Some rewards cards also charge annual fees. A portion, but by no means all, of these fees are effectively returned to some spenders in the form of rewards. More spending is still a net benefit to the companies—even if it is a smaller one.

Historically rewards have also enticed some consumers to borrow more as well. That is important because the money made from lending via cards made up about 80% of credit-card profitability from 2014 to 2021, according to the Fed staff’s research note.

In a recent study across hundreds of millions of U.S. credit cards, researchers at the National University of Singapore, the International Monetary Fund and the Federal Reserve found evidence that rewards cards can induce cardholders, especially those with relatively low FICO credit scores, to “overborrow” versus classic cards.

> Six of the biggest card-issuing banks said they spent nearly $68 billion, combined, for rewards and some related costs in 2022, up roughly 43% from 2019.

“High-FICO cardholders on average earn money with the use of reward cards while low-FICO cardholders on average lose money,” they wrote. Overall, the study found that rewards cards drove a $15 billion annualized “redistribution” from low-score to high-score consumers.

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That’s been a long-standing premise, here and at FWF - those who carry balances are the reason they keep giving rewards to those of us who just harvest reward value. Someone else’s interest payments are subsidizing my month cashback check.

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What the heck does “overborrow” mean? Does that mean that an idiot who carries a balance and pays 20+% interest on it does another dumb thing?

Maybe I’m reading too much into it, but the article wants to portray the idiots as victims. Nowadays being a victim is the best thing you can be.

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The fix is to cap interchange fees at something low, but it basically kills the rewards game for us.

Probably a portmanteau of overspend+borrow. There’s also a long-standing premise/argument that people overspend when using credit cards (vs cash). The article suggests that people with low FICO scores spend even more with rewards cards than with “classic” cards, so if they also carry a balance, it means they borrowed more than they would have with classic cards.

I found this article about interchange fees from the point of view of merchants.

A complicated mess. Here’s what they say about rewards cards.

Rewards Cards

In recent years, issuing banks have been offering rewards cards that come with perks, such as frequent flier miles or cash back on purchases. Guess who ultimately gets to pay for these perks? That’s right, you do!

Interchange fees will inevitably be higher if your customer pays with a rewards card. The use of rewards cards particularly impacts your processing costs if you’re on a tiered pricing plan. Tiered plans often downgrade these transactions to nonqualified, and the rates for these types of transactions are frequently two or even three times higher than those for qualified transactions.

Edit.
Fairly large differences in cost between credit card processors

  • Mastercard: 1.45% to 2.90%
  • Visa: 1.30% to 2.60%
  • American Express: 1.80% to 3.25%
  • Discover: 1.55% to 2.45%
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It’s dumb but I think what they mean is that all things being equal (ceteris paribus) that an individual will spend more money when they have a rewards card than when they do not have a rewards card.

Probably some stupid psychology with people thinking they are saving money or perhaps they need to spend to hit a rewards tier.

Isn’t that true of almost everything? A couple of examples …
People who don’t plan ahead and book travel air/boat/auto at the last minute subsidize people who plan ahead.

People who shop for groceries without paying attention to sales subsidize the shoppers who do pay attention to sales.

Don’t get me wrong. The price of planning/booking ahead and looking at grocery flyers is time. People who aren’t organized, or spend their time on other things are effectively paying me for my time. I find nothing wrong with that.

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Or to not allow people with low credit scores to be eligible for rewards cards. Of course, the DOJ, ACLU, SPLC, and others would have their lawsuits filed before the ink is dry on the rule.