What’s In Your Wallet?

Credit card rewards are largely paid for by low-income people who cannot afford them, revealing a system reflective of America’s cutthroat personal finance culture.

Reading Time: 3 minutes

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By Ashley La

While walking up to the Terry’s cash register, bagel or roll in hand, you may have noticed the paper sign taped to the counter reporting the store’s small tax on credit card purchases. That tax may seem to be an unfair nuisance or a disheartening reality check on just how much you spend on lunch each day, but it’s actually an attempted remedy to one of the underlying components of America’s unjust payment system.

America loves credit cards. Every Super Bowl, Samuel L. Jackson asks us, “What’s In Your Wallet?” and goes on about the endless reward points and cash back of Capital One. All credit card users have to do to get these rewards is use their cards and pay back their loans to the credit card company on time. In America’s consumerist culture, the idea of spending to be able to spend more sounds too good to turn down. Credit cards further help users by providing money to spend in advance of receiving a paycheck. As long as users pay their credit card bills on time, they can raise their credit scores, which makes it easier to qualify for bank loans in the future. On the surface, the system seems to benefit responsible spenders, but in reality, it benefits the rich.

When you swipe a credit card to pay for an item, the merchant automatically has to pay a processing fee to the credit card company. Many think that credit card companies get their money from charging interest on debt, but processing fees are also a major source of the money that comes back as rewards for users. To compensate for the merchant fee, many businesses raise the prices of all goods, which ends up hurting low-income customers who tend to use cash or prepaid cards. Credit card users remain unharmed because the high prices are offset by the rewards they receive from credit card companies. Over time, these user rewards add up. The richer you are, the more money you can spend and the higher your rewards become.

The Federal Reserve Bank of New York recently reported that half of low-income households do not have access to credit cards, generally because companies deny poorer individuals good rates. Undocumented individuals who do not have access to banking also cannot qualify for credit cards, which cuts them off from many necessary benefits. Credit card users rack up high credit scores by successfully paying their fees on time, which helps them qualify for loans that poorer individuals with low credit scores arguably need more. This cycle leaves low-income people paying the high prices of credit cards with no rewards while still being unable to qualify for loans. These economic conditions only exacerbate the existing structural inequities in the United States and contribute to the growing wealth gap.

Despite the inequality credit card companies create, it is still expected that you get a credit card once you begin your adult life. This norm is indicative of the nature of America’s cutthroat economic system. Richer individuals are able to profit off of their existing money, while poorer individuals must overcome many barriers to even have access to basic economic tools like credit cards. Even if they do qualify, the lack of financial literacy in low-income communities can cause irresponsible credit card usage. Credit card debt levels relative to income are highest among low-income families.

While America’s current credit system is causing harm, credit cards cannot just go away. People working at credit card companies, long-term customers who do not want to change their routines, and people who need high credit scores for a mortgage are just some of the many groups who would surely reject this abolishment. Despite a general nationwide awareness of the vastness of income inequality in the US, individual action seems impossible. But it is important to keep in mind that systemic issues like credit exist because we create and uphold them, meaning we can also change them. This action looks like boycotting cashless stores and encouraging stores (like Ferry’s) to factor in credit card fees at the register rather than marking up all their prices. We can also advocate for financial literacy courses in public schools so that people of all socioeconomic backgrounds can learn how to build credit. Down the line, our generation may even be able to envision a new system of credit that is more accessible to all.