Credit Card Points Are Being Paid For by the Poor

According to the San Francisco Fed, Americans with annual incomes at the national median (a bit less than $70,000) use credit cards for 23 percent of purchases. The numbers drop off precipitously as income decreases. Roughly half of all households use cash or debit cards for most purchases. Households with annual incomes over $150,000 use a credit card the most frequently, or 44 percent of the time.

The poor are much less likely to have access to rewards credit cards, even if they want them. Why? Cards with the highest value rewards are often available only to the rich. First, you’ll need a credit score of at least 700 to qualify for a premium card. That eliminates half the country. And only 21 percent of Black households have FICO scores above 700. Second, issuers consider your income and debt-to-income ratio, which can be used to disqualify card applicants with high credit scores. Banks just don’t want to issue rewards-heavy cards and pay lucrative sign-on bonuses to consumers who have low credit limits and spend much less overall.

Now consider the design of these rewards programs: five times as many points on hotels, three times as many points on dining, a $300 credit to SoulCycle, a $100 credit to Saks Fifth Avenue. This generation of prestige points cards often rewards discretionary, even luxury purchases, further transferring dollars to the highest income card holders. Cash-back cards available to households with lower credit scores and incomes offer more modest rewards than their prestige alternatives do.

Visa and Mastercard operate the two largest card networks, accounting for 77 percent of about 650 million general purpose credit cards in the United States. They act as agents for thousands of banks and dictate the terms and fees that merchants must pay.

And business is booming. In 2021 these two companies generated $77 billion in credit card interchange fees, which they share with issuing banks.

The aggregate costs of credit card points, driven by Visa and Mastercard’s longstanding interchange duopoly, spurred Senators Richard Durbin, Democrat of Illinois, and Roger Marshall, Republican of Kansas, to introduce the Credit Card Competition Act last July. The House soon followed with its own bipartisan bill. Yet multiple attempts to attach the legislation to military and omnibus funding bills by year’s end failed.

The act would have forced Visa and Mastercard to compete head-to-head with other processors, reducing their overwhelming market power to set rates. Lower interchange fees can mean lower prices for consumers. (Despite expected opposition from the now-Republican-controlled House, Mr. Durbin plans to reintroduce the bill this year, his office said.)