August 09, 2010
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News: Paying Cash Puts Money In The Pocket Of Others
A recent report indicates that cardholders from households that are more financially strapped are paying for the cash back and reward points of cardholders who are better off. A recent report by the Federal Reserve Bank of Boston indicates that the average household that pays cash contributes $151 a year to those households that use credit cards. Overall, households that use credit cards regularly gain on average $1,482 each from those who pay cash. Are you confused? You should be. How it works is that merchants pay a fee every time a customer uses his credit card to pay for purchases. These fees cost merchants anywhere between one and three percent. To recoup the fee, merchants add the cost of these transactions to the price of the merchandise. So, those who pay cash are actually paying the fees for the cardholder charging his sale.
Because some credit cards offer higher rewards, these premium cards typically cost the merchant more. The bank charges a higher fee to pay for the higher rewards. Furthermore, cardholders who use premium cards are usually those that use their cards on a regular basis and have the resources to manage the card debt. Premium cardholders are not individually charged the higher fee, but once again the merchant integrates the cost of the higher fees into the retail cost of the merchandise. According to the report, the Fed of Boston labels the process a "regressive transfer" of wealth. The authors, Scott Schuh, Oz Shy and Joana Stavins say that the concept occurs because consumers are lacking the knowledge as to how using credit cards affect the merchant fees and retail prices.
The report also indicated that approximately 75 percent of the American households use credit cards and that total U.S. card spending continues to increase annually. This doesn't mean to say that Americans are spending more, but what it does implicate is that Americans are paying less with cash and more with their cards. It has been reported through other resources that in the wake of the recent recession, overall Americans have reduced card debt and switching from credit to debit. Banks have also begun offering consumers more reward points when they use credit over debit. Why? Because the transactions fees for debit are lower than credit. Therefore, banks get more money from the merchant if the cardholder used the credit feature.