https://archive.is/GqQev Many “transactors” are still effectively paying lots of money for their credit cards, but it’s hidden and they don’t see it on their credit card bill. High-end retailers...
In the credit-card industry, the well-to-do are known as transactors. They pay off their balance in full every month, avoiding late fees and interest charges. They use credit cards as a convenient payment method, and as a way to earn travel points, cash back, airport-lounge vouchers, seat upgrades, and other goodies. Given how valuable these rewards are, transactors make money by spending money. “If you’re spending $100,000 a year, you’re getting maybe $1,500 back in terms of points or cash,” Aaron Klein of the Brookings Institution told me. “You’re not paying taxes on that. It’s worth closer to $2,500 or $3,000 a year in taxable income.” (That’s double the average worker’s weekly earnings.)
Credit-card companies compete intensely for transactors’ business, Klein explained. These customers rarely default. They rack up huge monthly charges, with firms such as Chase, Citi, American Express, and Capital One skimming a share of their spending. They travel often, allowing credit-card companies to make lucrative deals with airlines and hotel chains.
Many “transactors” are still effectively paying lots of money for their credit cards, but it’s hidden and they don’t see it on their credit card bill. High-end retailers have high margins and larger marketing expenses. Retailers are happy to pay marketing expenses to credit card companies to try to get more business from rich people.
This hidden subsidy is less likely to happen at discount retailers with slim margins, but there are other marketing programs targeted at less wealthy people, like buy now, pay later schemes.
[Edit: changed link to a better article.]
In contrast, the have-nots are known as revolvers. Revolvers are subprime borrowers who use credit cards as a payment tool and as a short-term loan, to cover surprise expenses and groceries the week before payday. Such customers tend to take out no-frills cards, without lavish cash-back rewards and travel points. They also tend to carry a balance from month to month, and sometimes from month to month to month to month.
…
Rossman noted that high-income families were beginning to look more like working-class families in the credit-card data, with some transactors becoming revolvers. Three in five households credit-card debtors making more than $80,000 annually have been carrying a balance for more than a year, he said. Seriously delinquent balances are increasing, as is the share of loans that some card companies consider unrecoverable. Investors have noticed: The price of shares in American Express, Discover, Capital One, and other lending companies have dropped more than the broader market. Politicians have noticed too: A bipartisan House bill would cap credit-card interest rates at 10 percent, and a Senate proposal would lower swipe fees.
If the transactors paid cash instead of using a credit card, they'd still be paying the same amount, but they wouldn't get any of the benefits. Everyone is paying for the credit cards, whether...
Many “transactors” are still effectively paying lots of money for their credit cards, but it’s hidden and they don’t see it on their credit card bill.
If the transactors paid cash instead of using a credit card, they'd still be paying the same amount, but they wouldn't get any of the benefits. Everyone is paying for the credit cards, whether they use a credit card or not.
Some places (especially restaurants) offer cash discounts of ~5%. And while it's likely that it facilitates a certain amount of money laundering and/or tax evasion, as a consumer, it's certainly better for my wallet.
I read that line as going beyond the markup in prices for accepting cards and more as they are being steered towards services and products with higher markups that cover marketing expenses. So...
I read that line as going beyond the markup in prices for accepting cards and more as they are being steered towards services and products with higher markups that cover marketing expenses. So basically the credit card company offers cash back etc. but then also works with different businesses to market deals to these customers. So now you can get travel benefits, hotel stays etc. and these are not as ubiquitous as retailers accepting credit cards so the cost isn't as evenly distributed to all people.
So the transactor may fly Southwest because of some travel benefits with their card, while someone else not influenced by this might explore more avenues for a better deal with a different airline. Southwest may charge more for that flight and thus the transactor could essentially be paying for that benefit they are getting in ways they don't realize.
Interesting perspective. I think it's probably both. Like, why wouldn't they try to make money at all steps of the process? I just get straight cash back for my credit card, so I don't have much...
Interesting perspective. I think it's probably both. Like, why wouldn't they try to make money at all steps of the process?
I just get straight cash back for my credit card, so I don't have much experience with the "credit card points" side of things, but what you said makes sense.
Are they calling $80k household income a high-income family? That would be a wild miscategorization. Still, 3/5 having a balance for over a year is somewhat concerning.
Are they calling $80k household income a high-income family? That would be a wild miscategorization. Still, 3/5 having a balance for over a year is somewhat concerning.
I was going to call that into question as well. While $80,000 is nothing to sneeze at (and reasonably high earning in quite a bit of the country) in most major cities it's middle-class ish. I...
I was going to call that into question as well. While $80,000 is nothing to sneeze at (and reasonably high earning in quite a bit of the country) in most major cities it's middle-class ish. I still don't like to see families carrying balances, especially if that category traditionally didn't carry a balance. Perhaps if I find some time tonight, I'll look into seeing if I can find the dataset and dig into their data a bit. (Narrator: He won't find time and will forget about this comment before tomorrow morning, disappointing himself yet again.)
The article has some good information, but there's one thing that I take issue with, and it's this idea that there are only two types of people that use credit cards: rich and poor. That rich...
The article has some good information, but there's one thing that I take issue with, and it's this idea that there are only two types of people that use credit cards: rich and poor. That rich people use it and make tons of free money from credit cards, and poor people are taken advantage of because they can't pay off their balances on time. While those people definitely exist (and according to the article there seems to be a lot more people in debt than I would have imagined), you don't need to be filthy rich just to take advantage of their benefits. It's not an all-or-nothing thing.
I won't pretend that income and other socioeconomic factors don't play a heavy role in these sorts of things, and people with a lower income and without family safety nets are definitely taken advantage of by the system, but it is 100% possible to benefit from credit cards without making $100,000+ a year (let alone spending that much each year like the article mentions). Even those already in debt can benefit from some cards that allow for 0% APR financing for 15/18/24 months, often with low or no transfer fees. If your credit isn't completely tanked, getting a new credit card every now and then can be incredibly helpful with breaking large payments into smaller ones (with no interest being the key), or getting some introductory offers for money that you would have spent anyways, or getting cash back on the things you spend on the most.
Say you're thinking of getting a new dishwasher and your budget for it is around 500 bucks. There are some no-annual-fee cards that give you 200 bucks back for spending 500 bucks in the first 90 days or whatever. So you do the card, buy the dishwasher, and you've made 200 bucks for spending money that you were already gonna spend anyways. You don't ever have to touch the card after that if you don't want to. And it even helps your credit score because it's one more line of credit and a bit of extra credit limit.
Say you have a mechanical issue with your car that's gonna cost you 1,800 bucks to resolve. If you don't have that kind of money up front (or don't want to pay it all at once), you could get a credit card that offers 0%APR for 18 months and then suddenly instead of paying $1800 all at once, you're paying about 100 bucks each month for 18 months. Essentially taking a 0% interest loan for free.
I have a coworker who is very proud of the fact that he doesn't have any credit cards and instead uses cash for everything. To each their own, but he's also mentioned before how expensive groceries have gotten lately (he has a large family), as well as how much he spends on gas because of his long commute. He could easily save himself a few hundred bucks a year by getting a card or two that gives him 3-6% back on groceries and gas.
There are a lot of valid reasons to not get a credit card, like psychological ones or maybe large amounts of existing debt. But you don't need to be in a 'high-income family' like the article mentions in order to take advantage of their benefits, you just need to be financially literate, which is the biggest issue that the article does not really mention. Tons of adults I know don't understand interest and loans and retirement accounts and tax brackets and other financial concepts and topics. Well how the hell would they have learned these things if their parents didn't understand it either and their schools never taught them? Shit's complicated, yo. People are just thrown to the wolves when they reach adulthood and often times end up making mistakes early on that have lasting impacts for years to come.
Came here to mention this exactly. The Amex Blue Cash Preferred card for example gets you 6% back on groceries and streaming, 3% back on gas and transit, and 1% back on everything else. It does...
He could easily save himself a few hundred bucks a year by getting a card or two that gives him 3-6% back on groceries and gas.
Came here to mention this exactly. The Amex Blue Cash Preferred card for example gets you 6% back on groceries and streaming, 3% back on gas and transit, and 1% back on everything else. It does have an annual fee of $95, but you’ll be making that back several times over, and all it takes is spending you would’ve been doing anyway. The only “catch” is that one needs to use it responsibly and pay off their statement balance each month.
And that's how most people who fell from the one category to the next are "caught" I would imagine : they're paying it off paying it off and then suddenly they lost a job or had medical bills or a...
And that's how most people who fell from the one category to the next are "caught" I would imagine : they're paying it off paying it off and then suddenly they lost a job or had medical bills or a home reno cost. They're still the same responsibile people but they suddenly don't have the same income to spending levels
This is what I'm currently going through. Mr. tired was out of work for the entirety of 2024, and my income alone isn't enough to cover rent, groceries, medical..... Now we need to scrape...
This is what I'm currently going through. Mr. tired was out of work for the entirety of 2024, and my income alone isn't enough to cover rent, groceries, medical..... Now we need to scrape ourselves out of it.
I feel for you, friend. That is the exact kind of situation that better societal safety nets should hopefully help with. Some people are lucky to be able to just rely on family when they are down...
I feel for you, friend. That is the exact kind of situation that better societal safety nets should hopefully help with. Some people are lucky to be able to just rely on family when they are down on their luck. Others don't have that luxury, so the exact same situation (losing your job plus a big medical bill) will suddenly set them back years.
Sorry for the unsolicited advice, as I don't know everything about your finances, but if you're paying high interest credit card bills, have you checked to see if you qualify for any debt consolidation? There are credit cards that provide this service (like you transfer other credit card debt onto it for 0/3/5% of the total value, then you have a certain amount of time without any more interest generating). Or if the debt is too big for that, there are debt consolidation loans that, while not great, are way better than the sky-high interest rates that credit cards charge.
Thanks. I have a debt consolidation loan now, it is good advice when you don't have a card that can offer debt transfer. Thankfully, it's going to be paid off in the next year, and by then, we...
Thanks. I have a debt consolidation loan now, it is good advice when you don't have a card that can offer debt transfer. Thankfully, it's going to be paid off in the next year, and by then, we will have our savings built back up again. This all happened even with family help with finances. It was just a tough year, and we drained our savings.
Glad to hear it! It's so quick and easy to lose all your savings to things that are outside of your control, yet so difficult and time-consuming to build it back up. I saw your username and though...
Glad to hear it! It's so quick and easy to lose all your savings to things that are outside of your control, yet so difficult and time-consuming to build it back up. I saw your username and though 'yup, this person gets it'.
Absolutely, and in that circumstance it makes sense to call up the card provider and downgrade the card to something free and adjust spending habits to compensate (e.g. less pre-prepared and...
Absolutely, and in that circumstance it makes sense to call up the card provider and downgrade the card to something free and adjust spending habits to compensate (e.g. less pre-prepared and speciality food, more preparation-required bulk staples). If I found myself in that situation I’d probably do something similar to what my parents did to stretch available funds further when raising four kids, which was to buy things like rolled oats in 5-gallon buckets from a food coop at steeply reduced prices compared to what grocery stores ask.
Like, an animal food co-op? I don't know if there are people food co-op that sell buckets of oats in Canada....we do have food pantries though. I also remember eating flour + water + salt for a...
Like, an animal food co-op? I don't know if there are people food co-op that sell buckets of oats in Canada....we do have food pantries though.
I also remember eating flour + water + salt for a bit when we fell on hard times. Mom took a job as house cleaner specifically because they give her unwanted leftovers. Dad became a butcher because we get discounted / free bones.
The co-op might’ve sold animal food too, but we only bought food intended for human consumption. Oats, various wheats we ground into flour, big rolls of Amish-made butter, etc.
The co-op might’ve sold animal food too, but we only bought food intended for human consumption. Oats, various wheats we ground into flour, big rolls of Amish-made butter, etc.
Funny enough that's the exact card I was thinking of for his scenario. I have a mix of different cards for all sorts of purposes. And if I don't have a card for that specific category (or if you...
Funny enough that's the exact card I was thinking of for his scenario.
I have a mix of different cards for all sorts of purposes. And if I don't have a card for that specific category (or if you don't want to remember which card is for what), then there are plenty of cards that just give you a flat 2% back without any categories to think about.
Some banks also hold some pretty timely deals with their points systems, too. The card that's my daily driver has a 36x points bonus for doing taxes online through H&R Block. If the average cost...
Some banks also hold some pretty timely deals with their points systems, too.
The card that's my daily driver has a 36x points bonus for doing taxes online through H&R Block. If the average cost for services rendered is something like $300, then:
300 x 36 = 10,800 points, which is a $108 value.
While in the grand scheme of things, $108 may be a spit in the bucket when on the topic of taxes, any triple-digit number would be a genuine help on a different endeavor.
Yeah I’ve gotten quite a bit back out of SoFi’s setup, where if you have their bank account and direct deposit your paycheck into it you get 3x points on everything on the accompanying credit card...
Yeah I’ve gotten quite a bit back out of SoFi’s setup, where if you have their bank account and direct deposit your paycheck into it you get 3x points on everything on the accompanying credit card for the first year and I think 2x after that, which can then be redeemed into their savings account which currently has a 3.8% APY (and was as high as 4.3% in the past). With that credit card being my catchall for the things that don’t slot into higher returns on other cards I’ve made a substantial amount back over the past couple of years or so.
Yes, there are lot of expenses that can be reduced if you're willing to pay attention to marketing games. They will give you a discount if you do a little work to show you care about getting the...
Yes, there are lot of expenses that can be reduced if you're willing to pay attention to marketing games. They will give you a discount if you do a little work to show you care about getting the best price or you're willing to be tracked.
Other examples: grocery store coupons and shopping cards. Limited-time sales prices, which can be used to offer a lower price to the frugal while charging more to people who don't pay attention and just buy things when they need them. Introductory rates on subscriptions, which are a way of charging people more if they don't set a calendar reminder and cancel in time.
So the question is whether to ignore all that stuff and get charged more, or spend time and attention on these games to try and optimize your purchases.
The luxury of time: if someone has more time to spend gaming the system, waiting for lowest price points, having time to price compare quotes, remembering to cancel trials etc they save a ton of...
The luxury of time: if someone has more time to spend gaming the system, waiting for lowest price points, having time to price compare quotes, remembering to cancel trials etc they save a ton of money.
Was going to say the same thing. I save a lot of money each year by being frugal and researching every possible avenue that I can utilize to squeeze out some extra money from the things I'm...
Was going to say the same thing.
So the question is whether to ignore all that stuff and get charged more, or spend time and attention on these games to try and optimize your purchases.
I save a lot of money each year by being a cheapskate frugal and researching every possible avenue that I can utilize to squeeze out some extra money from the things I'm already spending on, whether it be coupons, sales, credit cards, or something else. But all of that requires time, and I probably spend more time on that than I'd like to admit. But if you don't have that much time to spend hunting for these sorts of savings, or were never taught any of this stuff and have to learn it all from scratch, then suddenly it becomes infinitely more challenging to do. It's hard to blame someone for not taking advantage of something that they would need to spend an unreasonable amount of time (which they don't have) researching.
And it doesn't help that for every legitimate savings opportunity out there, there are countless other scams and attempts to part you with your money. Just knowing what's a good deal and what's actually too good to be true is difficult in and of itself. It's like that meme about Black Friday price labels where something is marked up the week before and then goes on 'sale' back to the regular price, except everything is like that always every time. It takes a lot of mental bandwidth to be able to weed through the multitude of offers of financing and deals and savings other such bullshit. It's a system that makes it so complicated and difficult to never mess up, yet so incredibly easy and punishing if/when you do.
You don't really need to game the system? Or rather, I think you're conflating two very different styles of marketing and reward. Yes there's "churning" or whatever it's called where you're...
You don't really need to game the system?
Or rather, I think you're conflating two very different styles of marketing and reward. Yes there's "churning" or whatever it's called where you're constantly looking for the best deal and shifting around.
Things like the amex though have been that way for years. Basically every major card company has some area they try to attract in, and for amex it's gas and groceries. The only issues with it are:
Do you spend enough to justify the yearly cost?
Do you qualify?
Can you make sure you don't carry a balance?
These aren't the sort of things that require constant and up to date knowledge of the latest CC marketing schemes or doing weird things like getting 2 different chase cards so you can spend points from one in the store from another.
It's just a question of financial literacy mostly, and there's a lot of tools and sites these days that will help narrow it down very very quickly.
Yeah, a relatively small amount of attention can go a long way. I use a rather broad definition of "playing the game." Sometimes the game is paying any attention at all and shopping around, when...
Yeah, a relatively small amount of attention can go a long way.
I use a rather broad definition of "playing the game." Sometimes the game is paying any attention at all and shopping around, when for some products, people might go years or decades without looking into it.
For example, maybe they use the credit card they got in college, pay it off each month, throw out every credit card offer they get, and figure that's good enough. Or just continue to pay for the car insurance they have every year.
It might not take all that much time per year to make a significant improvement, but it does take some attention and it's not something most people consider fun.
This kinda goes back to financial literacy though and just how lacking it is worldwide. The number of people I know who just do not understand credit cards, or didn't get them until super recently...
This kinda goes back to financial literacy though and just how lacking it is worldwide.
The number of people I know who just do not understand credit cards, or didn't get them until super recently (in their 30's) is shockingly high given the world runs on shit like credit checks. Maybe it shouldn't, but it does, and I think that a lack of education in this area is just egregious.
I don't find lots of boring bill/tax/etc stuff fun either, but i'm glad I was taught about it or learned it through whatever means because ignoring it comes at significant costs. Hell i'm still teaching people "For the love of god pay down your CC first" because they don't really connect that the 20%+ interest on the card is costing them more than whatever the hell they're running it up with.
Part of it comes down to how quickly things have changed, I think. As a child in the 90s, my mother used checks to pay for most things that weren’t ordered over the phone and that didn’t really...
Part of it comes down to how quickly things have changed, I think. As a child in the 90s, my mother used checks to pay for most things that weren’t ordered over the phone and that didn’t really start to change until the very tail end of that decade and the beginning of the 2000s, with the rise of e-commerce. My father only ever paid for anything with cash or check. Consequently, I was taught how to balance a checkbook and was able to get a debit card for internet usage, but was never taught anything about credit cards or debt of any sort.
I agree that because it's so ubiquitous for the world to run on credit that people should know about it, but I also don't necessarily find it that surprising people don't understand it because I...
The number of people I know who just do not understand credit cards, or didn't get them until super recently (in their 30's) is shockingly high given the world runs on shit like credit checks. Maybe it shouldn't, but it does, and I think that a lack of education in this area is just egregious.
I agree that because it's so ubiquitous for the world to run on credit that people should know about it, but I also don't necessarily find it that surprising people don't understand it because I think it's counter-intuitive on an initial glance level.
Someone is giving you a card that lets you buy things with their money with the expectation that you'll pay them back (with legal recourse fallback if you don't), and they'll also give you 2% back on whatever you purchase and it is absolutely no cost to you at all if you pay them back within a month. Just at an initial glance level, I'd meet that suggestion with such skepticism that it would have to be a scam and anyone pushing it is a scammer. That would trigger the 'if it sounds too good to be true, it is' alarm. On some level I think it's wise that people who don't understand it don't partake in it, but obviously as I recognize how the credit system is and the costs that are incurred by not engaging with it and overall makes it not as wise to ignore it.
Then when you learn that merchants pay a fee for every transaction to accept payment of credit cards and realize merchants are just going to pass those costs along, the cash back is actually a scam except you're somehow getting scammed even more if you don't use a card to get the cash back. Then you also recognize credit card companies are tracking and selling data about your purchases too.
Like many financial systems, they are all very scam-like. The stock market is gambling. Cryptocurrency isn't currency at all but just speculative investment, aka gambling. Social security... Hell monetary systems themselves, why is a dollar today worth less than a dollar 10 years ago? I know why these systems are the way they are and I'm vastly oversimplifying them to make a point, that question about the dollar is rhetorical, not saying there aren't good reasons, I'm saying if you don't understand them, it's not unreasonable to be skeptical of them because they all have scam-like qualities to them. Yet many of these are also valuable tools and services part of modern society and in some ways we'd be worse off without them.
First thought: no they won't, there are so many choices between free rewards cards, folks would drop them immediately if they raised fees. Second thought: they're not gonna raise fees on...
Rossman noted that he expected credit-card issuers to raise fees to make up for the lost revenue.
First thought: no they won't, there are so many choices between free rewards cards, folks would drop them immediately if they raised fees.
Second thought: they're not gonna raise fees on transactor rewards cards, they're going to raise fees on basic Walmart / grocery give nothing take everything revolver cards.
Or maybe they will introduce new cards with better rates, while raising fees on the old cards to get more revenue from people who aren't paying enough attention to switch.
Or maybe they will introduce new cards with better rates, while raising fees on the old cards to get more revenue from people who aren't paying enough attention to switch.
Thank you for posting this. I found the distinction between transactors and revolvers pretty useful and will keep it in mind. I think the article misses the truth behind revolver cards, though. In...
Thank you for posting this. I found the distinction between transactors and revolvers pretty useful and will keep it in mind.
I think the article misses the truth behind revolver cards, though. In particular, the article seems to suggest that the poor are somehow subsidizing the rich here.
The people swiping their cards to pay for food and gas are also paying for wealthy cardholders’ upgrades to business class.
“When you talk to rich people who pay off their balance, they think that credit-card companies are losing money on them, and they’re the ones subsidizing the people who carry a balance,” Klein explained. “It’s the exact opposite.”
I do not know what "the exact opposite" means here, but I guarantee the credit card companies have internal calculations suggesting they are expected to profit off of each of their customers. It's just that the profits are made in different ways.
Everybody pays more for their goods; only fancy cardholders get juicy perks and cash returned to them.
Accepting a basic credit card costs perhaps 1.5 percent, and a fancy rewards card as much as 4 percent.
Fundamentally, the upper class (not the ultra-wealthy worth billions, but the high-value employees worth millions) drive the economy. Since they spend the most, exclusive high-value credit cards have much more negotiating power on fees. Also, high-end retailers are more likely to bear those high fees without complaint since they can pass them on to the consumer.
Transactors get much better perks because they spend a lot more. If you spend $200,000 with your credit card each year, credit card companies make between $2,500 and $7,500 (more if you have a "fancy" credit card). They are incentivized by competition to give some of that back to you so you don't switch to a different holder.
[Transactors] travel often, allowing credit-card companies to make lucrative deals with airlines and hotel chains.
Credit card companies can also incentivize spending with certain companies and become advertisers in a sense.
The industry argues that swipe fees, not interest and penalties on poorer customers, finance its cash-back and travel programs, Ted Rossman of Bankrate, the financial data and news site, told me. But he does not “totally buy that.” It’s all “part of the calculation.”
I'm remain convinced that if the "industry" found it was losing money on its highest-spending customers, it would raise its fees or lower its rewards; if customers left, those companies would make money!
Revolvers are subprime borrowers who use credit cards as a payment tool and as a short-term loan, to cover surprise expenses and groceries the week before payday. Such customers tend to take out no-frills cards, without lavish cash-back rewards and travel points.
The hard truth is that high-quality loans are only ever afforded to the wealthy with good credit, and this will always be the case so long as the loaners are profit-seeking. These consumers would not be able to afford their payments without credit cards, so they use them. Credit card companies try to extract as much value as possible before selling off those subprime loans to a debt collector if the balance is deliquent.
These loans and their interest rates are extremely predatory; these families' desparation affords them no negotiating power. However, if the predatory loans were made illegal, companies might just stop offering them, depending on their risk analysis. The worst case scenario is that families go to mobs and under-the-table loan sharks for money instead of banks. At least banks don't retaliate with violence.
It's also true that some of these families would be able to escape the cycle of poverty without such high interest rates. This is one reason why unconditional cash transfer is becoming a popular form of charity. I have not looked into it, but I wonder if a non-profit could try setting up credit cards that are less predatory as a form of good.
Naturally, they would have to run at a loss, and "we're a credit card company" is a pretty bad advertisement for a charity, but I wonder if it could work.
You and the article are talking about different things. What the article is talking about is how merchant fees work. Merchants will bake in the cost of CC transactions on their pricing, and...
I think the article misses the truth behind revolver cards, though. In particular, the article seems to suggest that the poor are somehow subsidizing the rich here.
You and the article are talking about different things. What the article is talking about is how merchant fees work.
Merchants will bake in the cost of CC transactions on their pricing, and everyone who buys from them will pay that margin increase, but only people with rewards CCs get a benefit from it.
e.g, let's say you have Bob's Luxury Socks store. Bob's CC processor charges him 3% for each transaction (and that 3% is then split between the processor, the card rails, and the issuing bank). Bob adjusts his prices - not necessarily, but potentially, passing 100% of it on. So prices can go up on everything from between 0-3%. It depends on the exact demand/supply curve for the exact item.
Either way, things are more expensive. Someone with a rewards card will reap some of that 3% back on rewards. Someone paying with a debit card or cash will STILL pay that 3%, and get nothing in return ever.
The "poor subsidize the rich" not in transactor vs revolver, but transactor vs everyone else.
https://archive.is/GqQev
Many “transactors” are still effectively paying lots of money for their credit cards, but it’s hidden and they don’t see it on their credit card bill. High-end retailers have high margins and larger marketing expenses. Retailers are happy to pay marketing expenses to credit card companies to try to get more business from rich people.
This hidden subsidy is less likely to happen at discount retailers with slim margins, but there are other marketing programs targeted at less wealthy people, like buy now, pay later schemes.
[Edit: changed link to a better article.]
…
If the transactors paid cash instead of using a credit card, they'd still be paying the same amount, but they wouldn't get any of the benefits. Everyone is paying for the credit cards, whether they use a credit card or not.
Some places (especially restaurants) offer cash discounts of ~5%. And while it's likely that it facilitates a certain amount of money laundering and/or tax evasion, as a consumer, it's certainly better for my wallet.
I read that line as going beyond the markup in prices for accepting cards and more as they are being steered towards services and products with higher markups that cover marketing expenses. So basically the credit card company offers cash back etc. but then also works with different businesses to market deals to these customers. So now you can get travel benefits, hotel stays etc. and these are not as ubiquitous as retailers accepting credit cards so the cost isn't as evenly distributed to all people.
So the transactor may fly Southwest because of some travel benefits with their card, while someone else not influenced by this might explore more avenues for a better deal with a different airline. Southwest may charge more for that flight and thus the transactor could essentially be paying for that benefit they are getting in ways they don't realize.
Interesting perspective. I think it's probably both. Like, why wouldn't they try to make money at all steps of the process?
I just get straight cash back for my credit card, so I don't have much experience with the "credit card points" side of things, but what you said makes sense.
Are they calling $80k household income a high-income family? That would be a wild miscategorization. Still, 3/5 having a balance for over a year is somewhat concerning.
I was going to call that into question as well. While $80,000 is nothing to sneeze at (and reasonably high earning in quite a bit of the country) in most major cities it's middle-class ish. I still don't like to see families carrying balances, especially if that category traditionally didn't carry a balance. Perhaps if I find some time tonight, I'll look into seeing if I can find the dataset and dig into their data a bit. (Narrator: He won't find time and will forget about this comment before tomorrow morning, disappointing himself yet again.)
The article didn't mention but link to link defined it: "serious delinquency [is] defined as 90 or more days past due"
The article has some good information, but there's one thing that I take issue with, and it's this idea that there are only two types of people that use credit cards: rich and poor. That rich people use it and make tons of free money from credit cards, and poor people are taken advantage of because they can't pay off their balances on time. While those people definitely exist (and according to the article there seems to be a lot more people in debt than I would have imagined), you don't need to be filthy rich just to take advantage of their benefits. It's not an all-or-nothing thing.
I won't pretend that income and other socioeconomic factors don't play a heavy role in these sorts of things, and people with a lower income and without family safety nets are definitely taken advantage of by the system, but it is 100% possible to benefit from credit cards without making $100,000+ a year (let alone spending that much each year like the article mentions). Even those already in debt can benefit from some cards that allow for 0% APR financing for 15/18/24 months, often with low or no transfer fees. If your credit isn't completely tanked, getting a new credit card every now and then can be incredibly helpful with breaking large payments into smaller ones (with no interest being the key), or getting some introductory offers for money that you would have spent anyways, or getting cash back on the things you spend on the most.
Say you're thinking of getting a new dishwasher and your budget for it is around 500 bucks. There are some no-annual-fee cards that give you 200 bucks back for spending 500 bucks in the first 90 days or whatever. So you do the card, buy the dishwasher, and you've made 200 bucks for spending money that you were already gonna spend anyways. You don't ever have to touch the card after that if you don't want to. And it even helps your credit score because it's one more line of credit and a bit of extra credit limit.
Say you have a mechanical issue with your car that's gonna cost you 1,800 bucks to resolve. If you don't have that kind of money up front (or don't want to pay it all at once), you could get a credit card that offers 0%APR for 18 months and then suddenly instead of paying $1800 all at once, you're paying about 100 bucks each month for 18 months. Essentially taking a 0% interest loan for free.
I have a coworker who is very proud of the fact that he doesn't have any credit cards and instead uses cash for everything. To each their own, but he's also mentioned before how expensive groceries have gotten lately (he has a large family), as well as how much he spends on gas because of his long commute. He could easily save himself a few hundred bucks a year by getting a card or two that gives him 3-6% back on groceries and gas.
There are a lot of valid reasons to not get a credit card, like psychological ones or maybe large amounts of existing debt. But you don't need to be in a 'high-income family' like the article mentions in order to take advantage of their benefits, you just need to be financially literate, which is the biggest issue that the article does not really mention. Tons of adults I know don't understand interest and loans and retirement accounts and tax brackets and other financial concepts and topics. Well how the hell would they have learned these things if their parents didn't understand it either and their schools never taught them? Shit's complicated, yo. People are just thrown to the wolves when they reach adulthood and often times end up making mistakes early on that have lasting impacts for years to come.
Came here to mention this exactly. The Amex Blue Cash Preferred card for example gets you 6% back on groceries and streaming, 3% back on gas and transit, and 1% back on everything else. It does have an annual fee of $95, but you’ll be making that back several times over, and all it takes is spending you would’ve been doing anyway. The only “catch” is that one needs to use it responsibly and pay off their statement balance each month.
And that's how most people who fell from the one category to the next are "caught" I would imagine : they're paying it off paying it off and then suddenly they lost a job or had medical bills or a home reno cost. They're still the same responsibile people but they suddenly don't have the same income to spending levels
This is what I'm currently going through. Mr. tired was out of work for the entirety of 2024, and my income alone isn't enough to cover rent, groceries, medical..... Now we need to scrape ourselves out of it.
I feel for you, friend. That is the exact kind of situation that better societal safety nets should hopefully help with. Some people are lucky to be able to just rely on family when they are down on their luck. Others don't have that luxury, so the exact same situation (losing your job plus a big medical bill) will suddenly set them back years.
Sorry for the unsolicited advice, as I don't know everything about your finances, but if you're paying high interest credit card bills, have you checked to see if you qualify for any debt consolidation? There are credit cards that provide this service (like you transfer other credit card debt onto it for 0/3/5% of the total value, then you have a certain amount of time without any more interest generating). Or if the debt is too big for that, there are debt consolidation loans that, while not great, are way better than the sky-high interest rates that credit cards charge.
Anyways, good luck!
Thanks. I have a debt consolidation loan now, it is good advice when you don't have a card that can offer debt transfer. Thankfully, it's going to be paid off in the next year, and by then, we will have our savings built back up again. This all happened even with family help with finances. It was just a tough year, and we drained our savings.
Glad to hear it! It's so quick and easy to lose all your savings to things that are outside of your control, yet so difficult and time-consuming to build it back up. I saw your username and though 'yup, this person gets it'.
That's a relief to hear, tired, you sound super with it and you guys will be back in the black soon enough.
I hope so! Fingers crossed we can all get out of whatever debts we have.
Absolutely, and in that circumstance it makes sense to call up the card provider and downgrade the card to something free and adjust spending habits to compensate (e.g. less pre-prepared and speciality food, more preparation-required bulk staples). If I found myself in that situation I’d probably do something similar to what my parents did to stretch available funds further when raising four kids, which was to buy things like rolled oats in 5-gallon buckets from a food coop at steeply reduced prices compared to what grocery stores ask.
Like, an animal food co-op? I don't know if there are people food co-op that sell buckets of oats in Canada....we do have food pantries though.
I also remember eating flour + water + salt for a bit when we fell on hard times. Mom took a job as house cleaner specifically because they give her unwanted leftovers. Dad became a butcher because we get discounted / free bones.
The co-op might’ve sold animal food too, but we only bought food intended for human consumption. Oats, various wheats we ground into flour, big rolls of Amish-made butter, etc.
I've had that card for over 10yr. I think I carried a balance on it twice in that time. And I make less than 100k. I just treat it like a debt card.
Funny enough that's the exact card I was thinking of for his scenario.
I have a mix of different cards for all sorts of purposes. And if I don't have a card for that specific category (or if you don't want to remember which card is for what), then there are plenty of cards that just give you a flat 2% back without any categories to think about.
Some banks also hold some pretty timely deals with their points systems, too.
The card that's my daily driver has a 36x points bonus for doing taxes online through H&R Block. If the average cost for services rendered is something like $300, then:
300 x 36 = 10,800 points, which is a $108 value.
While in the grand scheme of things, $108 may be a spit in the bucket when on the topic of taxes, any triple-digit number would be a genuine help on a different endeavor.
That's gas for a month, right there.
Yeah I’ve gotten quite a bit back out of SoFi’s setup, where if you have their bank account and direct deposit your paycheck into it you get 3x points on everything on the accompanying credit card for the first year and I think 2x after that, which can then be redeemed into their savings account which currently has a 3.8% APY (and was as high as 4.3% in the past). With that credit card being my catchall for the things that don’t slot into higher returns on other cards I’ve made a substantial amount back over the past couple of years or so.
Yes, there are lot of expenses that can be reduced if you're willing to pay attention to marketing games. They will give you a discount if you do a little work to show you care about getting the best price or you're willing to be tracked.
Other examples: grocery store coupons and shopping cards. Limited-time sales prices, which can be used to offer a lower price to the frugal while charging more to people who don't pay attention and just buy things when they need them. Introductory rates on subscriptions, which are a way of charging people more if they don't set a calendar reminder and cancel in time.
So the question is whether to ignore all that stuff and get charged more, or spend time and attention on these games to try and optimize your purchases.
The luxury of time: if someone has more time to spend gaming the system, waiting for lowest price points, having time to price compare quotes, remembering to cancel trials etc they save a ton of money.
Was going to say the same thing.
I save a lot of money each year by being
a cheapskatefrugal and researching every possible avenue that I can utilize to squeeze out some extra money from the things I'm already spending on, whether it be coupons, sales, credit cards, or something else. But all of that requires time, and I probably spend more time on that than I'd like to admit. But if you don't have that much time to spend hunting for these sorts of savings, or were never taught any of this stuff and have to learn it all from scratch, then suddenly it becomes infinitely more challenging to do. It's hard to blame someone for not taking advantage of something that they would need to spend an unreasonable amount of time (which they don't have) researching.And it doesn't help that for every legitimate savings opportunity out there, there are countless other scams and attempts to part you with your money. Just knowing what's a good deal and what's actually too good to be true is difficult in and of itself. It's like that meme about Black Friday price labels where something is marked up the week before and then goes on 'sale' back to the regular price, except everything is like that always every time. It takes a lot of mental bandwidth to be able to weed through the multitude of offers of financing and deals and savings other such bullshit. It's a system that makes it so complicated and difficult to never mess up, yet so incredibly easy and punishing if/when you do.
You don't really need to game the system?
Or rather, I think you're conflating two very different styles of marketing and reward. Yes there's "churning" or whatever it's called where you're constantly looking for the best deal and shifting around.
Things like the amex though have been that way for years. Basically every major card company has some area they try to attract in, and for amex it's gas and groceries. The only issues with it are:
These aren't the sort of things that require constant and up to date knowledge of the latest CC marketing schemes or doing weird things like getting 2 different chase cards so you can spend points from one in the store from another.
It's just a question of financial literacy mostly, and there's a lot of tools and sites these days that will help narrow it down very very quickly.
Yeah, a relatively small amount of attention can go a long way.
I use a rather broad definition of "playing the game." Sometimes the game is paying any attention at all and shopping around, when for some products, people might go years or decades without looking into it.
For example, maybe they use the credit card they got in college, pay it off each month, throw out every credit card offer they get, and figure that's good enough. Or just continue to pay for the car insurance they have every year.
It might not take all that much time per year to make a significant improvement, but it does take some attention and it's not something most people consider fun.
This kinda goes back to financial literacy though and just how lacking it is worldwide.
The number of people I know who just do not understand credit cards, or didn't get them until super recently (in their 30's) is shockingly high given the world runs on shit like credit checks. Maybe it shouldn't, but it does, and I think that a lack of education in this area is just egregious.
I don't find lots of boring bill/tax/etc stuff fun either, but i'm glad I was taught about it or learned it through whatever means because ignoring it comes at significant costs. Hell i'm still teaching people "For the love of god pay down your CC first" because they don't really connect that the 20%+ interest on the card is costing them more than whatever the hell they're running it up with.
Part of it comes down to how quickly things have changed, I think. As a child in the 90s, my mother used checks to pay for most things that weren’t ordered over the phone and that didn’t really start to change until the very tail end of that decade and the beginning of the 2000s, with the rise of e-commerce. My father only ever paid for anything with cash or check. Consequently, I was taught how to balance a checkbook and was able to get a debit card for internet usage, but was never taught anything about credit cards or debt of any sort.
I agree that because it's so ubiquitous for the world to run on credit that people should know about it, but I also don't necessarily find it that surprising people don't understand it because I think it's counter-intuitive on an initial glance level.
Someone is giving you a card that lets you buy things with their money with the expectation that you'll pay them back (with legal recourse fallback if you don't), and they'll also give you 2% back on whatever you purchase and it is absolutely no cost to you at all if you pay them back within a month. Just at an initial glance level, I'd meet that suggestion with such skepticism that it would have to be a scam and anyone pushing it is a scammer. That would trigger the 'if it sounds too good to be true, it is' alarm. On some level I think it's wise that people who don't understand it don't partake in it, but obviously as I recognize how the credit system is and the costs that are incurred by not engaging with it and overall makes it not as wise to ignore it.
Then when you learn that merchants pay a fee for every transaction to accept payment of credit cards and realize merchants are just going to pass those costs along, the cash back is actually a scam except you're somehow getting scammed even more if you don't use a card to get the cash back. Then you also recognize credit card companies are tracking and selling data about your purchases too.
Like many financial systems, they are all very scam-like. The stock market is gambling. Cryptocurrency isn't currency at all but just speculative investment, aka gambling. Social security... Hell monetary systems themselves, why is a dollar today worth less than a dollar 10 years ago? I know why these systems are the way they are and I'm vastly oversimplifying them to make a point, that question about the dollar is rhetorical, not saying there aren't good reasons, I'm saying if you don't understand them, it's not unreasonable to be skeptical of them because they all have scam-like qualities to them. Yet many of these are also valuable tools and services part of modern society and in some ways we'd be worse off without them.
First thought: no they won't, there are so many choices between free rewards cards, folks would drop them immediately if they raised fees.
Second thought: they're not gonna raise fees on transactor rewards cards, they're going to raise fees on basic Walmart / grocery give nothing take everything revolver cards.
Or maybe they will introduce new cards with better rates, while raising fees on the old cards to get more revenue from people who aren't paying enough attention to switch.
Yuck, it forces people to keep jumping around every year shopping for reasonable prices. Like insurance
Thank you for posting this. I found the distinction between transactors and revolvers pretty useful and will keep it in mind.
I think the article misses the truth behind revolver cards, though. In particular, the article seems to suggest that the poor are somehow subsidizing the rich here.
I do not know what "the exact opposite" means here, but I guarantee the credit card companies have internal calculations suggesting they are expected to profit off of each of their customers. It's just that the profits are made in different ways.
Fundamentally, the upper class (not the ultra-wealthy worth billions, but the high-value employees worth millions) drive the economy. Since they spend the most, exclusive high-value credit cards have much more negotiating power on fees. Also, high-end retailers are more likely to bear those high fees without complaint since they can pass them on to the consumer.
Transactors get much better perks because they spend a lot more. If you spend $200,000 with your credit card each year, credit card companies make between $2,500 and $7,500 (more if you have a "fancy" credit card). They are incentivized by competition to give some of that back to you so you don't switch to a different holder.
Credit card companies can also incentivize spending with certain companies and become advertisers in a sense.
I'm remain convinced that if the "industry" found it was losing money on its highest-spending customers, it would raise its fees or lower its rewards; if customers left, those companies would make money!
The hard truth is that high-quality loans are only ever afforded to the wealthy with good credit, and this will always be the case so long as the loaners are profit-seeking. These consumers would not be able to afford their payments without credit cards, so they use them. Credit card companies try to extract as much value as possible before selling off those subprime loans to a debt collector if the balance is deliquent.
These loans and their interest rates are extremely predatory; these families' desparation affords them no negotiating power. However, if the predatory loans were made illegal, companies might just stop offering them, depending on their risk analysis. The worst case scenario is that families go to mobs and under-the-table loan sharks for money instead of banks. At least banks don't retaliate with violence.
It's also true that some of these families would be able to escape the cycle of poverty without such high interest rates. This is one reason why unconditional cash transfer is becoming a popular form of charity. I have not looked into it, but I wonder if a non-profit could try setting up credit cards that are less predatory as a form of good.
Naturally, they would have to run at a loss, and "we're a credit card company" is a pretty bad advertisement for a charity, but I wonder if it could work.
You and the article are talking about different things. What the article is talking about is how merchant fees work.
Merchants will bake in the cost of CC transactions on their pricing, and everyone who buys from them will pay that margin increase, but only people with rewards CCs get a benefit from it.
e.g, let's say you have Bob's Luxury Socks store. Bob's CC processor charges him 3% for each transaction (and that 3% is then split between the processor, the card rails, and the issuing bank). Bob adjusts his prices - not necessarily, but potentially, passing 100% of it on. So prices can go up on everything from between 0-3%. It depends on the exact demand/supply curve for the exact item.
Either way, things are more expensive. Someone with a rewards card will reap some of that 3% back on rewards. Someone paying with a debit card or cash will STILL pay that 3%, and get nothing in return ever.
The "poor subsidize the rich" not in transactor vs revolver, but transactor vs everyone else.