HomeFinanceAre lower-income Americans paying for wealthy consumers' credit card rewards? Some economists...

Are lower-income Americans paying for wealthy consumers’ credit card rewards? Some economists say they are – UnlistedNews

Have you ever gotten a free flight because of your Delta SkyMiles card? Or maybe you get the benefit of walking through the TSA PreCheck express line at the airport instead of waiting in the general security line which is usually very long due to your Capital One Venture Rewards Card.

About 90% of all credit card expenses It’s in the rewards cards. If you play the game right and maximize your rewards, you could save at least a few hundred dollars every year.

“We’ve created an ecosystem where we’ve essentially been giving a drug to the consumer, which is these rewards cards,” said Sumit Agarwal, a finance professor at the National University of Singapore. “And the reason we continue to give this drug is that we know it’s very cost-effective and we know the consumer is addicted to it.”

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In 2019, for all the spending on these types of credit cards, the largest banks in the US paid almost $35 billion in rewards. But where does that money come from?

In that same year, banks reported more than $140 billion in revenue from all credit cards. That comes from three main sources of income: $9.9 billion in fee income, $89.7 billion in interest income and $41.3 billion in exchange or transfer fees. More than half of that revenue comes from rewards credit cards, according to Agarwal.

Agarwal and other economists, in a study, concluded that the reward credit card system creates an estimated annual redistribution of more than $15 billion from less educated to more educated areas, from poorer to wealthier, and from high to low minority areas, widening existing disparities. That means there is $15 billion that could be distributed in a different way to achieve greater equality.

“low FICO [credit score] customers essentially spend so much more on these rewards cards to get access to the rewards, which is only 2% or 3% of the total value of the spend, that they accumulate debt and that accumulation of debt causes… this huge payment of interest that goes to the bank,” Agarwal said.

“It also goes to high FICO customers, because these high FICO customers only use these rewards but don’t accumulate any debt,” Agarwal said.

“So they’re getting cross-subsidized in the process of using their reward cards,” he added.

But Andy Navarrete, Capital One’s executive vice president and head of external affairs, said there are no cross-subsidies and that the rewards cards at the bank are designed to be profitable on their own.

We have created an ecosystem where we have essentially been giving a drug to the consumer.

sumit agarval

professor of finance at the National University of Singapore

“While there are certainly customers who choose to borrow with their credit cards, those are typically not the revenue streams that fund rewards cards,” Navarrete said.

“The flawed premise behind this study was that those who maintain balances and therefore pay interest are actually cross-subsidizing or contributing to the profitability of rewards programs in general,” Navarrete added.

“That’s not the case actually,” he said.

Look the video above for more information.

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Sara Marcus
Sara Marcushttps://unlistednews.com
Meet Sara Marcus, our newest addition to the Unlisted News team! Sara is a talented author and cultural critic, whose work has appeared in a variety of publications. Sara's writing style is characterized by its incisiveness and thought-provoking nature, and her insightful commentary on music, politics, and social justice is sure to captivate our readers. We are thrilled to have her join our team and look forward to sharing her work with our readers.
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