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Contrary to popular belief, this is not a situation where the rich get richer and the poor get poorer.

Key points

  • One study found that consumers with lower credit scores and suboptimal payment habits pay for credit card rewards.
  • Consumers with higher credit scores who avoid interest charges come out ahead.
  • If you always pay your bill in full, you can take advantage of rewards credit cards.

Lots of people love using rewards credit cards, and it’s easy to see why. There are cards that earn 3%, 4%, and sometimes even 5% or more on purchases in certain categories. You also have the option of earning cash back, airline miles, or flexible reward points.

It’s great for those who get big rewards, but who pays for it? After all, credit card companies can’t make something of value out of nothing. It is logical to think that if someone succeeds, another person does not.

Some have claimed that it is a reverse Robin Hood situation. Wealthy Americans are the ones who benefit, while poorer Americans who pay with cash or debit cards foot the bill in the form of higher prices. However, a recent study found that this is not the case. Whether you benefit or lose money from credit card rewards depends primarily on your financial habits.

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Who pays for credit card rewards?

A study published in December 2022, “Who Pays Your Rewards? Redistribution in the Credit Card Market,” looked at how rewards redistribute wealth. He found that credit card rewards don’t simply transfer wealth from poorer to richer people.

In reality, it is consumers with higher credit scores who benefit at the expense of consumers with lower credit scores. The study refers to these two groups as sophisticated consumers and naive consumers.

To understand why, we need to look at how card issuers fund their rewards programs. The largest banks in the US paid $34.8 billion in credit card rewards in 2019. There are three types of fees used to pay for this:

  1. Credit card interest: Cardholders who carry a balance from month to month are charged credit card interest.
  2. Exchange fees: Merchants pay processing fees to accept credit cards. One of these processing fees, the interchange fee, is paid to the bank that issues the card.
  3. Card fees: Some credit cards have additional fees, the most common being an annual fee.

Of those fees, interchange fees are the ones that contribute to higher prices. If a merchant makes a $100 sale, he gets to keep $97.50 or $98 after all processing fees are deducted. Merchants increase prices to balance the payment of these fees. Cash and debit card users pay the same higher prices, without earning rewards. But there are some clarifications to add here.

You don’t have to be rich to get a rewards card. The best rewards credit cards require good credit, but your income is not a factor in your credit score. You can build a high credit score and qualify for rewards cards no matter your income and bank account balances.

There are also those other two charges to consider. In 2019, the largest banks in the US made more than twice as much money from interest and card fees as they did from interchange fees. They reported income from:

  • $89.7 billion on credit card interest
  • $41.3 billion of interchange fees
  • $9.9 billion in income from card commissions

The rewards study compared rewards earned and fees paid by cardholders with different credit scores and incomes. It found that rewards cardholders with high FICO® scores earned more in rewards than they paid in fees. Rewards cardholders with low FICO® scores paid more in fees than they earned in rewards. This was due to the suboptimal habits of the latter group, which have higher balances and pay more interest.

It also clarifies that these results “are not driven by income, as they are held within subsamples of low-, medium-, and high-income people.” It was credit habits that mattered, not how much money consumers made.

How to benefit from credit card rewards

It’s easy to be part of that “sophisticated consumer” group that benefits from credit card rewards. There are only a couple of things you need to do.

The most important thing is to always pay your credit card balance in full. When you pay in full, you are not charged interest. The value of the rewards will never exceed the cost of the interest, so this is crucial.

Also, avoid unnecessary card charges. Pay on time so you don’t get a late fee. If you’re considering a card with an annual fee, make sure it has enough benefits to offset it. Credit cards with annual fees can provide much more value, but only if you can take advantage of their benefits.

Credit card rewards are paid primarily by consumers with lower credit scores who carry balances and incur more interest charges. To some extent, shoppers who use cash and debit cards also pay higher prices. The good news is that with any income, you can be one of the consumers that benefits. Get a rewards credit card, pay the bill in full every month, and you’ll win.

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