Comment by empath75 | Hacker News Reader

Comment by empath75 | Hacker News Reader

Rewards cards are really just a way to reward wealthy people for being wealthy.

I went through a bankruptcy in my early 30s, largely because of credit card debt, and then immediately started getting big pay raises. 7 years later, I came out of it with an 800 credit score and a six figure salary and it was an incredible eye opener how much money and kickbacks credit card companies are giving to wealthy people for the privilege of using their card, while I was getting fucked 10 ways to Sunday on interest when I was making 30k a year and struggling to make minimum payments. I worked out the math later and it turned out that even with the bankruptcy I had paid well over the amount I borrowed in interest and had barely put a dent in the principle.

These days I’m regularly getting $100 cash back rewards and free flights or hotel rooms and not paying a penny in interest.

I don’t really get the economic incentive of shoveling money at wealthy people while grinding down lower class people into debt slavery.

Wealthy people are more profitable for them. Who would you rather have as a customer, someone who puts $3,000/month on their cars (warning you a nice 2% or so of that) and always pays, or someone who puts $500/month on the card and is likely to go into default due to overspending or losing their job or an illness in the family or something?

There’s no conspiracy here, any more than there’s a conspiracy behind the large discount you can get if you buy a year’s supply of toilet paper at once.

I'm pretty sure the opposite is true for credit card companies. The wealthy tend to pay down the balance before interest is even charged, while the poor tend to carry balances forever paying mostly interest while getting hit with other fees.

It is true, however, that wealthy people carry much less risk for them so they may have similar expected values (this is just a guess)

You’d expect for them to hit an equilibrium where the expected values are similar. You’re absolutely right that a poor person who carries a balance forever and pays a ton of interest is extremely valuable, but that’s countered by people who stop paying altogether. It’s the same reason a wealthy person (or rather, a person with good credit, which I’m sure correlates strongly with wealth) can get a better interest rate on a mortgage or car loan.

I think his point is that wealthy people spend more, so the card brands can charge more interest to the merchants. If you spend $20,000 and Amex charges 5% that's $1000 in fees. But a poor person who spent $500 only earns them $25 in fees to the merchant. Now it's true that the poor person if they can't pay might pay 20% interest, but the real money maker for the card brands is not the late payment fees but the processing fees which is the gist of the lawsuit and the article.

I question whether the interest is worth more than the merchant fees they get from wealthy people using the card constantly.

If one poor person is paying, say, 11% interest on their $500 balance for a year, then the company makes a few hundred bucks on the interest. If a wealthier person spends $50k (admittedly random number I made up, its going to vary vastly for different card-holders, and probably in the millions for many) with their card over the course of the year but pays it all off immediately, they've made between 1k and 1.5k risk-free on the 2-3% merchant fees, and the customer will probably continue to use that card.

You have the basics correct, but not where they make the profit from. Someone spending $3,000/month on a card and paying it off winds up paying little to no interest. However, they do get to make a good deal off of the fees.

Like the article says, the fees make the cards a lot of money.

That person putting $500 per month on the card likely isn't poor either unless they are paying most of their expenses with it and paying the card off each month. Again, they get some fees. With a limit high enough for $500 a month without paying it off, they aren't as high risk - after all, that is at least a $6,000 limit. That's a full 20% of a 30k/year income, after all.

These folks are in a middle ground. The company can make some of their money off of transaction fees, but will try to make up for it through interest rates, which won't be all that horrible.

The actual poor person has a credit limit of $500-$1000. They aren't spending enough for the company to make much from fees, so they try to make it up in interest.

Poor people are not profitable enough to deserve equal treatment. Airline flights aren’t useful to people with starving babies or people whose very existence is illegal. Those people have different desires and other marketing strategies are more effective.

And there is the system itself: value exists in transactions, not money. Money is just another commodity. When you have a pile of money, it’s a safe bet there is only one thing you care to do with it: make more. Investments in things you don’t expect to be rising in value are unlikely, but since that pile of money isn’t profitable until you invest it, your choices are limited. All people with piles of money come to the same conclusion: throw it at rich people because that usually seems like the best way to make it get bigger on it’s own. Even if this likelihood even outweighs massive risk, it’s still better than contributing to society because if it works, it will be guaranteed to only take from society instead... which is much easier and somehow still garners social approval.

For society which depends on vertical circulation, the result is catastrophic waste. But the goal was to profit, which requires transactions.

Most of the best rewards cards are available to everyone. The rewards are more valuable to someone with low income. Case in point, when I had less money using Discover 5% rewards to buy clothes was more valuable than it is to me now.

Wealthy people are a more lucrative target for the type of surveillance that credit cards do. Their pot is obviously bigger, and their financial inefficiency is more steerable (whereas a poorer person's inefficiency will be out of necessity). eg ordering from Amazon without checking prices can be nudged into ordering from a different retailer without checking prices.

"The rich always get things cheaper, you know."

Filmmaker Willard Moss, speaking with Studs Terkel, likely in the 1970s. At about 00:02:00

https://s3.amazonaws.com/wfmt-studs-terkel/published/7546.mp...

They are a way to get card members that wouldn't otherwise be card members. The rewards are economic due to the delay between the cards receiving payment and issuing the rewards.

That's my understanding anyway. There is quite a bit written on why rewards cards are not free lunch in the end.

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