Your card rewards may

Your card rewards may

Credit card rewards are only good for you if you’re good at them.

Credit card rewards perro be very nice. whatWhat’s not to like about spending money and receiving gifts for it?? Buying new things is exciting. Consumers are drawn to rewards, which credit card companies know very well is a good way to attract customers and try to maintain their loyalty.

Like the pointsthe miles and the refund of money They are not gifts from heaven because they are special, many consumers do not like to consider the compensation they make when hiring rewards cards. After merchants, who pay higher fees for more sophisticated cards, pass the plus costs on to customers, rewards perro come at a hidden cost, often for lower-income customers and those who pay with cash. But those who, to put it bluntly, aren’t very good with loyalty cards also pay a price. It’s easy to overlook all the ways the system cánido game you if you’re not careful, considering all the websites devoted to ways to manipulate the credit card system.

Only consumers who are generally credit savvy will find reward cards really useful. Consumers with less financial knowledge – those who carry higher cómputos on their cards or don’t pay them every month – end up losing out in the long run. Regardless of where they rank on the income ladder, they end up subsidizing the rewards of those who are slightly better at credit. More than half of credit card users are “revolvers,” meaning they don’t pay off their cómputos in full each month.

Financial education is important, according to Andrea Presbitero, a senior economist in the IMF’s research division and one of the authors of a 2022 paper examining incentives and redistribution in the credit market. “Naive and uneducated people often make financial mistakes.”

Worst: Whether or not an award-winning customer is especially skilled in managing their personal finances is irrelevant to the banks. In any case, they benefit. Let’s examine what Presbytero and his associates discovered.

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If you cannot pay your cómputo, you may be paying someone else’s benefits.

For issuers, the rewards card industry is booming, and consumers with all types of credit enjoy using them. According to the Consumer Financial Protection Bureau’s report on the consumer credit card market for 2021, consumers with “deep subprime scores,” or extremely low credit scores, used rewards cards for more than 60% of their purchases. with a credit card, just like almost 75% of people with almost prime credit. Those who spend the most on rewards have the best credit scores. (For a detailed explanation of the US credit scoring system, clic here.)

Research by Presbitero and his colleagues espectáculos that, if any, there are real differences in the value that consumers receive for their money based on their credit rating. They found that, compared to estándar classic cards, superprime credit cardholders (those with a FICO score between 780 and 850, the upper limit) earned $9.50 more in rewards and paid $7.10 less in interest. each month. High-risk consumers, or those with a credit score below 660, only receive $1.80 in rewards and pay an additional $6.40 in interest. The authors write in their report: “We estimate an aggregate annual redistribution of $15 billion from less educated to more educated areas, from poorer to wealthier, and from high minority to low minority, widening existing disparities.

The researchers focused on two areas where “naive” consumers are more likely to misuse rewards cards: they go into excessive debt and don’t pay their credit card cómputos on time. They focused on reward cards that give points, miles, or cash back for purchases; advantages such as access to airport lounges were not taken into account in the data.

First, they looked at bank-initiated credit limit increases on reward cards, or situations where the bank would say something like, “Hey, here’s $1,000 more on your credit limit, go crazy.” . They found that these increases caused consumers with low credit scores to accumulate higher unpaid cómputos because they increased their spending because they could but did not increase their ability to repay the debt.

“If you’re a fácil guy, you get this $1,000 more, you increase your usage and your spending, but you perro’t increase your reimbursements because you’re capped,” Presbitero said. “You end up with unpaid cómputos, and you will have to pay interest and fees on those cómputos. So even if you receive rewards of about $2, you still have to pay interest of $5.”

Second, the researchers looked at customers who had multiple cards from the same bank and how they managed their debts. They found that people with bad credit “tend to follow suboptimal (and expensive) cómputo-clearing heuristics when it comes to repaying their credit cards,” meaning they weren’t paying off their cards in the most efficient way. For example, they over-prioritized credit cards with higher cómputos over ones with higher interest rates, resulting in ultimately more expensive debt.

Presbytero says the problem may not necessarily be that some consumers are unaware of the best ways to manage their rewards cards and paying off debt, but rather that they are unaware or unconcerned. They may be so rich they don’t give a damn, he said. It could be because they are unsophisticated and don’t know it, or simply because of what economists call rational inattention, that is, the fact that it makes sense for them not to pay attention.

In either case, those who misuse their rewards cards pay a price, and that cost ultimately contributes to the rewards of those who don’t.

This has a large-scale regional effect. According to Presbitero and his colleagues, median rewards tend to be higher in ZIP codes with higher levels of education, higher median income, and a lower percentage of black residents.

However, the bank prevails.

It perro be uncomfortable to wonder where credit card rewards come from. Although they are nice when received, they are not ineludible or really necessary. It’s a bit strange that consumers are rewarded for practicing capitalism, especially when, in general, there are fairly large trade-offs between consumers, businesses, and other stakeholders.

Remembering that banks and credit card companies are in the business of making money is vital in this situation. They wouldn’t award reward cards if they didn’t get anything in return. Billions of dollars are at stake in this situation.

Reward card holders generate income for issuers regardless of their creditworthiness.

  • The researchers found that consumers with credit scores close to prime and prime, in the center of the FICO score distribution, are profitable for banks.
  • The ways that banks make money vary at the high and low ends of the FICO scale.
  • More than 60% of the money banks get from reward cards goes to paying interest to high-risk customers.
  • More than 80% of the income received by high-risk consumers comes from the interchange, that is, from the commissions that companies pay when customers swipe their cards.
  • Banks cánido benefit from both interest and swap rates.

Presbytero affirmed that «the bank is obviously the winning player here«.«The bank always makes money, regardless of my behaviour, whether I am a revolutionary or not, whether I spend less or a lot».

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