Credit Card Points Are a Transfer from the Broke to the Comfortable | Hacker News Reader

Credit Card Points Are a Transfer from the Broke to the Comfortable

willisallstead.substack.com

36 pointswillio5832 comments

You hear this argument pretty often, but it's not true.

Credit card companies do make a lot of money off of interest. But they also make a lot of money off of interchange fees.

Businesses want wealthy customers because they spend more money, so they're willing to pay a higher interchange fee to access those customers. Higher interchange fees mean card companies can offer better rewards, which in turn attract more wealthy customers to their cards.

So even if credit card debt was not a thing, it would still be incredibly profitable for card companies to sell access to their rich cardholder clientele, and to in turn provide rewards to those cardholders.

Businesses raise prices to cover the interchange fee, which impacts lower income consumers disproportionately.

That's completely arbitrary though. They could also increase prices without any interchange fee. If people are willing to pay, the price goes up.

Cost (of which the interchange fee is but one) only affects the lowest possible price. No one ever gets that price.

People wouldn't be willing to pay the extra amount if it was cheaper at the store across the street.

But the store across the street also has to pay the interchange fee, so they're not cheaper.

CC fees are transferred directly to customers. It isn't arbitrary. There are plenty of low cost stores that don't accept CCs for this reason: it hurts low income people more than others.

It saves 2-3% to the consumer for grocery stores.

Yes, there is something to be said for this argument. Debit card and cash users pay slightly higher prices than they might otherwise, which do subsidize the rewards of credit card users. But this is distinct from the argument presented in the article, which is that poor people's credit card debt funds rich people's airline miles.

But there factors that counteract this. Merchants pay different average fees depending on the mix of cards that they accept. A dollar store probably sees fewer Chase Sapphire Reserved or Amex Platinum cards than a Gucci store does. Accordingly, the average interchange fee they pay is probably lower. [0]

Also fee surcharging is becoming more common in the US these days, and is already common is some other countries. Visa et al. still don't allow merchants to pass on the actual interchange they'll pay, but merchants can charge a fee to credit card transactions that they don't on debit or cash.

But my original point is that giving rich people credit card rewards are not a transfer from the poor to the rich. It's a rational business decision by card companies that does not require any outside funding source, from poor people or otherwise, to make work financially.

0: There are some other factors that complicate this, such as the risk profile of the business. Riskier generally means higher fees.

> make a lot of money off of interest

Looking at the debt numbers (something like 150 billion over 90 days delinquent) that may not even be the case, if you cover unpaid defaults with interest paid.

The mentioned idea of capping interest at 10% would probably mean credit cards not being issued to a large swath of the population.

I always assumed points, rewards, customer loyalty are economic choke points to ream the customer as much as possible.

Specifically with grocery stores, where they can track how price changes affect customer behavior; I'm pretty sure covid proved that they absolute will gouge when given cover.

secondary of course is the sales of data in the big data age.

I don't disagree with anything the author is saying. But the corollary, which the article doesn't really acknowledge, is that reforms like credit card interest caps and the Credit Card Competition Act would substantially limit consumer access to credit. That's the argument that banks raise every time and why interest rate caps always die in committee.

If advocates want to team up with Dave Ramsay and say "that's right, credit cards are bad, we want them to be less available", perhaps things could change one day. I'd donate to that cause. If we keep pretending that we could have exactly the same system with lower interest rates, I don't think we'll ever get anywhere.

I increasingly think people should have the option to define if they should be treated as an adult or not, kinda like an organ donor on their license.

Those who opt out would be protected from their own choices.

I think you're severely overrating the average level of financial literacy. If Alice has $3,000 in the bank with no credit card debt, and Bob has $10,000 in the bank with $7500 in credit card debt, who's richer? A lot of people will tell you that Bob is (he has three times as much money!), and a lot of reasonable, hard-working Bobs will tell you with a straight face that they're paying off as much as their budget allows each month. I don't think our financial regulations should require telling Bob that he's a child who can't be trusted to take care of himself; people shouldn't offer him products that are designed to exploit his mental accounting bias.

Thats exactly what I am talking about. Make a class of people that are protected on the basis of the illteracy, comprehension deficits, or lack of self control.

Let people decide if they want to be protected from their choices.

> I don't think our financial regulations should require telling Bob that he's a child who can't be trusted to take care of himself; people shouldn't offer him products that are designed to exploit his mental accounting bias.

It seems you want to protection and agree it is needed. If it hurts Bobs feelings, make the system opt out instead of opt in.

To me, making the system opt out means ensuring that half the stores you go to and constant junk mail aren't urging you to get free credit cards. Credit cards should be more like investment brokerage accounts: something that anyone can open, and can do irresponsible things with, but clearly messaged as an advanced and complex financial product rather than something a typical person should make an everyday part of their life.

But credit cards arent a very complec financial product, and the vast majority of people can manage them just fine, and get the benefit.

Do you have any reason to think junk mail is big factor in people getting credit cards? I would assume most people like the idea of convenience, and dont think they will go into debt. most are right.

But... Bob is a child. Why do we need to put training wheels and kneepads on every aspect of our world? Are we trying to completely decouple decision making from outcomes? Let the stupid people be stupid and let the smart people thrive, I say. If there is no such thing as a bad decision, nor is there a good one, thereby there is hardly any life left to live. Let people pilot their own lives.

> But the corollary, which the article doesn't really acknowledge, is that reforms like credit card interest caps and the Credit Card Competition Act would substantially limit consumer access to credit.

That's a good point, and of course there are downstream affects of this, but I wonder if that's a bad thing. We're not talking about reduction in ability to access say mortgage debt or something of that nature, we're talking credit card debt. Making it possible for a person to be in $10k, $20k, $40k+ in extremely high interest credit card debt doesn't seem like a positive for our economy overall to me. It really just masks the root of the problem, which is that people are working paycheck to paycheck and can't afford the occasional emergency.

What is this hypothetical tens of thousands of credit card debt made up of though? Yeah, some of it is going to be unnecessary luxuries, but some of it is going to be essentials like baby formula and groceries. Limiting how high the interest rate can be can only be a good thing. Usury is considered a crime in-and-of-itself in other countries.

Pay in full customers can be profitable through interchange fees alone, so I don't really follow how it is a wealth transfer

Merchants almost never pass along interchange fees to the customer. Instead, it's built into the prices that every customer pays the merchant, regardless if the customer uses a credit card, which means everyone pays for credit card rewards.

Are you saying that in the US, there's no "credit card surcharge" line item near the bottom of your receipts to cover it?

Sometimes, not always.

Yeah, they include the surcharge in the list price and give you a "discount" for paying in cash (or direct debit).

Some merchants include it as a separate line item. But remember that taxes aren't included in the list price, so it doesn't stand out as much as it does in other countries.

Aren’t they actually funded by swipe fees and the banks just make money off the interest but generally swipe fees are a transfer from the retailer to the consumer but ultimately built into the price.

It is jarring to read Claude talking like it uses credit cards or feels guilt over using reward points.

Author here! I promise I didn't use Claude for any of this. I will admit I'm working on developing a "voice" in my writing, so maybe that's what you're sensing. Thanks for the read anyway.

It's jarring to read a bunch of LLMs rushing to defend a predatory industry.

There's a very basic financial instrument called a credit card and if you just exercise a modicum of control and a hint of reasoning, you get to have cheaper purchases for your entire life with no downside.

Leftists think this is terrible, because when you voluntarily sign up for this instrument and then behave really stupidly, repeatedly over a long period with no reasoning or reflection, it's bad! We can't allow it! I can't say I agree with this worldview.

> you get to have cheaper purchases for your entire life with no downside

If you uncritically believe things like this, I have a bridge to sell you. You should praise me for it too, because that's the kind of thing you explicitly condone.

> Leftists think this is terrible

Nah, it says more about your worldview than it does about your favorite bogeyman, especially when you ignore the entire article and start attacking a straw man.

I don't understand. Are you objecting to "cheaper purchases" or "no downside"?

Yes the prices go up to subsidize the merchant fees. But they don't go up as much as I save in CC rewards, because my rewards are subsidized by people not using the card or using it poorly. I have 5% and 10% cards in certain categories and a 3% in all; abolishment of cards would never drop prices by that much.

As far as downside goes I've been paying with cc exclusively for a decade and I've never paid a cent of interest, so I'm not sure what it would be.

Sam Vimes "Boots" Theory of Socioeconomic Unfairnes, in article form.

The author couldn't even get through the first two sentences without being wrong. Credit card rewards are not funded by interest and this idea that credit card companies don't want you paying off your bill every month is retarded. The card issuer gets the majority of the interchange fee and makes a profit on every swipe even after accounting for rewards.

Bullshit guilt-tripping logic. Just the 150 billion from "interchange" (merchant fees) would be enough reason to fund the 15 billion (estimated) rewards.

What next, supermarket coupons as a wealth transfer mechanism?

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