Credit Card Perks Are Basically A Tax On The Poor

The following is just part of a New York Times article by Chenzi Xu and Jeffrey Reppucci: 

There’s an undeniable feeling of excitement when you turn your daily credit card swipes at Starbucks into first-class airfare or a weekend jaunt to Costa Rica. Thanks to mobile banking and the ease of autopay, you can scrupulously avoid any additional costs by paying your monthly bill in full. Free flights and exclusive discounts abound.

Something for nothing, right?

Not exactly nothing. Credit card perks for educated, usually urban professionals are being subsidized by people who have less. In other words, when you book a hotel room or enjoy entry to an airport lounge at no cost, poor consumers are ultimately footing the bill.

Demand for rewards is only going up. In 2016, Chase launched its Sapphire Reserve card. The card comes with perks, bonuses and points multipliers that for big-spending travelers and diners are worth far more than its steep $550 annual fee. There was so much initial demand that Chase ran out of the metal slabs it prints the cards on. Sapphire’s enormous success set off a credit card perks war, with numerous banks flooding the market with sign-on bonuses worth thousands of dollars.

In 2022, the Federal Reserve published data showing that the cost of rewards, as a share of total transaction volume on credit cards, increased 25 percent from 2015 through 2021. This bonanza has helped affluent professionals flood Instagram with envy-inducing shots of white sand beaches, hotel suites and plush airport lounges.

But these high-income travelers are also less likely to carry balances that incur interest charges and late fees, which traditionally increase profits for card issuers. So, to offset the cost of paying lavish rewards to these consumers, banks have sought to maximize other usage-based revenues.

Enter interchange fees, or the money it costs merchants to accept noncash payments. A recent study at Stanford found that when credit card rewards increase, so do these fees.

The United States now has some of the highest credit card processing costs in the world, typically at 2 percent to 2.25 percent of every purchase. This is eight to nine times as much as the prevailing swipe fee in the European Union. The vast majority of merchants pass these costs on to consumers by charging more for their products — regardless of how one pays.

The result? Lower-income consumers are forced to pay higher prices on the goods they buy, but they rarely receive any benefit from rewards programs, according to the Federal Reserve, which has been tracking the distributional effects of card rewards. Its December 2022 report estimates an annual redistribution of $15 billion in rewards value from poorer people to richer people, from low-education people to highly educated people and from diverse communities to less diverse communities.

Put another way, credit card rewards are essentially a tax on less affluent consumers, who are much more likely to pay for their goods with cash, debit cards or standard credit products that accrue no such rewards.

The Legal Loan Sharks

According to the Oxford American Desk Dictionary, the definition of a "loan shark" is a person who lends money at exorbitant rates of interest. Earlier in our history, most loan sharks were underworld figures making illegal loans. If you weren't able to pay the loan back, you ran the risk of some broken bones. It was a very lucrative business for the mob.

But that was before the financial institutions realized just how much money they were missing out on by not engaging in loan sharking. Today, the mob has been replaced by so-called "legal" financial institutions.

For many years, this was kept somewhat in check by state laws that limited yearly interest rates to 35-42%. That still sounds like loan sharking to me, but at least there was a limit. However, in 1980 the United States Congress proved their fealty to corporate financial interests by passing the Depository Institutions Deregulation and Monetary Control Act.

This law exempted federally chartered savings banks, installment plan sellers and chartered loan companies from having to obey state usury laws and limits. And since there is no federal usury limit, that meant there was no longer a limit on what interest rates could be charged.

Since then then interest rates have steadily crept up. This is especially true of the credit card companies (many of whom are also based in states that have eliminated interest rate limits). I guess it was only a matter of time before one or more of them began to throw caution to the wind and go above their normal 30-40% interest rates. Now one of them has done it, and I'm sure more will follow.

First Premier Bank has been offering credit cards with a credit line of $250. Of course that offer comes with first year fees of $256. That is an obvious rip-off to get a credit card where the entire credit limit is taken up with fees owed to the issuer. Congress tried to fix this kind of problem by passing a new law regarding credit card fairness. The new law caps fees like this at 25% of the credit limit.

Well, that should keep First Premier Bank from ripping off its customers, shouldn't it? Wrong! Congress only half did the job of trying to rein in the credit card companies. They refused to put any limit on the amount of interest a card company can charge.

First Premier Bank was quick to take advantage of the loophole left by Congress. They upped their credit limit to $300 and lowered their fees to $75 (the maximum 25%). Then they took the rather shocking move of raising the annual interest rate for the card to 79.9%.

They try to justify the outrageous new interest rate by saying the cards are offered to people who have credit problems. To me, that excuse just doesn't fly. To take people who are already having money problems in the middle of a recession and slap an 80% interest rate on them is not just wrong -- it's immoral, unethical and should be illegal.

This is nothing more than legal loan sharking. While these companies may not break any limbs for failure to pay on time, they can certainly ruin the credit rating of a person struggling to repair his/her credit and keep their head above water -- and that might be worse. With rates like this, how is a person supposed to get ahead?

Now that First Premier Bank has set an 80% interest rate, how long will it be before other credit card companies follow suit? Most may not instantly go to 80%, but I could see them raising a rate even for good customers to 50% or 60% and continue to creep toward that 80%. Why wouldn't they? They have already shown they care little for consumers by past actions. If First Premier Bank can get away with it, why shouldn't the others follow suit?

I wish we could count on Congress to protect consumers, but it doesn't look like we can. They have "reformed" both credit cards and health care, and consumers are worse off than ever. I don't think we can afford any more help from our pathetic corporate-owned Congress.

Each year our economy moves closer to exclusive use of electronic funds and credit and away from cash. How much time is left before we are all credit-slaves to the corporations?

Credit Cards - Making Loan Sharks Look Good

It looks like Congress is going to pass a bill that is going to change some of the laws regarding credit card companies and what they can do. A bill is badly needed, because right now the companies can pretty much do whatever they want.

Unfortunately, it looks like only minor changes will be made by the bill. A few things will be accomplished, such as:

* Giving card holders a grace period before a payment is considered late. A payment won't be marked as late (triggering fees and penalties) unless it is at least 30 days past the due date.

* Scrapping universal default. This was what allowed all credit card companies to raise your rates because you made a late payment to only one of them.

* Credit card companies will have to give you 45 days notice of a rate increase, and let you pay off items already purchased at the lower rate.

* If your rate is raised as a penalty for missing a payment, that penalty period would be capped at six months. If you were on time with payments during that six months, the rate would go back down to the pre-penalty rate.

* People under 21 will have to show proof of income or have a co-signer. The account would be capped at $500 and could not be raised without approval of the co-signer.

* If you pay more than the minimum payment, the payment overage must be applied to the part of the account being charged the highest interest rate.

These changes are needed, and I certainly don't mean to imply they're not. But the Congress has elected to ignore the biggest change that is needed -- to rein in the exorbitant and usurious interest rates being charged on some accounts.

There was a time in this country when it was both unethical and illegal to charge an interest rate of more than 20%. It was referred to as "loan sharking" and was considered to be criminal behavior. But the credit card companies make the old-fashioned loan sharks look good by comparison. Some of them are charging rates up to as much as 41%, and they're doing it legally.

Credit card companies are the new legal loan sharks.

Mis-Spending Government's Money

Once again, we see how weak and unethical leadership in the White House has filtered down and infected all levels and departments of the federal government. After finding credit card abuse in the Defense, Homeland Security and Veterans Affairs Departments, the Government Accountability Office (GAO-formerly the General Accounting Office) decided to do a review of all federal agencies. What they found was not good.

It seems that credit card abuse is rampant in all government agencies. After reviewing over a dozen departments for 2005 and 2006, the GAO found that 41% of $14 billion in credit card purchases did not follow proper government procedures. They were either not properly authorized or had not been signed off on by a third party as required by procedures.

About 48% of purchases over $2500 were unauthorized or improperly received. More than $1.8 million of laptops, iPods and digital cameras could not be found or accounted for. Instances of double-billing by employees were also found.

The GAO investigators said the government-wide breakdown in enforcing established controls and procedures was "unacceptably high". They found expenditures for internet dating services, tailor-made clothing, wine and brand-name liquor, $160 steak and crab dinners, and women's lingerie. One employee even wrote over $642,000 in credit card convience checks to a live-in boyfriend.

The GAO report said the General Services Administration and the Office of Management and Budget need to tighten their procedures and keep better track of purchases. That may be true, but you can't lay all of this at the feet of these two agencies.

Leadership starts at the top, and our top leadership has been a miserable failure. If Bush held his agency heads accountable, and they held their middle management accountable, and they held department heads accountable, and they held supervisors accountable, and they held employees accountable, then we wouldn't have this problem.

In a government agency, accountability must start at the top and filter down. If the top leadership is not competent, and does not demand competence in others, then it doesn't take long for a bureaucracy to run off the tracks.

The employees who mis-spent all this money must be held responsible, but they could not have done it without the incompetence of their leadership -- all the way up to the top.