Credit card fees: Would capping them really help consumers?

Credit card fees and rewards programs help the rich and hurt the poor, according to a recent report. But experts disagree whether a cap on fees would solve the disparity.

Elaine Thompson/AP/File
In this November 2009 file photo, a customer swipes a MasterCard credit card through a machine while checking out at a shop in Seattle. A new report says that credit-card fees and rewards programs disproportionately push costs onto low-income consumers and benefit high-income shoppers.

Credit cards tend to hurt the poor and benefit the rich, according to a recent report from the Boston Federal Reserve Bank, which found an “implicit money transfer” from the former to the latter.

As a result, the study found, households earning more than $150,000 receive an average annual subsidy of $756 for credit card use, while those earning $20,000 or less pay an average $23 a year.

One of the big reasons for this disparity is the credit-card fees charged to retailers.

The fees help the rich and hurt the poor because merchants pass the cost of those fees onto consumers in the form of higher prices, regardless of their payment method. So the poor, who are more likely to use cash than the rich, subsidize credit-card users by paying those high prices.

That inequity is augmented because high-income consumers are 20 percent more likely to receive credit card rewards from banks than low-income consumers are.

Congress has already limited retailer fees for debit cards. Should it do the same for credit cards?

Opinion is divided.

“Eliminating the merchant fee and credit card rewards (together) would increase consumer welfare,” conclude the report's co-authors Oz Shy, Scott Schuh, and Joanna Stavins

Neither the financial overhaul bill signed into law weeks ago – which limited merchant fees on debit-card purchases only – or last year’s Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, which among other things created rules for when banks can raise credit-card interest rates, does.

Not everyone agrees that capping merchant fees would make a significant difference.

“You would still not see a reduction in prices, retailers would most likely pocket that money because it would be extra money for them,” says Bill Hardekopf, CEO of, an online credit-card site for consumers based in Birmingham, Ala. “It might help retailers significantly, but wouldn’t help consumers very much.”

Mr. Hardekopf adds that “rewards programs are not all funded by interchange fees,” so implying that the fees fund rewards programs for higher-income credit card users might be "a little overstated."

However, it is possible that rewards programs provide incentives for credit-card users to make more purchasers with their cards, thereby increasing the amount in fees charged by banks and paid by consumers.

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