A recent study found that credit cards transfer wealth from the poor to the rich. J.D. of Get Rich Slowly stated that it would not change the way he uses credit cards. Adam at ManvsDebt used the study to support the reasons he does not use credit cards.
The obvious alternative to credit cards is to use a debit card tied to a checking account. These checking accounts represent a transfer of wealth from the poor to the rich as well.
The Federal Reserve Bank of Boston includes this quote on their download page. “Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general.” Banks cover the cost of providing a checking account mainly from overdraft fees and debit card interchange fees. A 2006 FDIC study found a correlation between household income and overdraft fees, those who live in lower income areas were much more likely to have incurred overdraft charges. Following the reasoning in the credit card study the conclusion is that checking represents a transfer wealth from low-income to high-income households.
Adam concludes that “consumers who use cash or other forms of payment pay marked up prices to account for the transaction fees generated by those which use credit cards.” Since debit cards also charge interchange fees it is fair to conclude that they account for some percentage of the marked up prices. Debit card users benefit because the fees cover the cost of providing them with a checking account and sometimes debit cards provide rewards as well. It is only the cash customer paying the marked up prices who doesn’t receive any benefit. Who is most likely to be paying cash?
Adam has chosen to opt out of the credit card industry because he doesn’t agree with credit card industry practices. Debit cards are a lesser evil but they do share many of the practices of the credit card industry.
Is the answer to just use cash with no checking account? Those who don’t have checking accounts often have to buy money orders and pay a hefty fee to cash their paychecks. I haven’t done the research but it is easy to see how that would also represent a transfer of wealth from the poor to the rich. Just using cash doesn’t seem to be a viable alternative.
I am going to just continue using my credit cards, debit cards, and checking accounts as usual. Although I don’t agree with some of the practices of these companies by being financially responsible one can avoid much of the cost.
What would be your solution?
Banking is not free.
When the Fed was paying 6% overnight, banks could afford to offer free accounts. Today, that is not the case.
So the banks will create charges where there were none before.
A diligent consumer can avoid all of them. The unbanked, the ignorant, the poor that Adam cites as victims should not be exploited, but nor should they be allowed shirk responsibility for their own choices.
Most banks charge $5 to cash checks if you don’t have an account. That isn’t unreasonable – you can always open a savings account at no charge. If it is a recurring payment, i.e. payroll, usually, direct-deposit will waive any fees for a checking account.
There is nothing wrong with using money orders. In the poor neighborhoods I frequent, they’re free. Yes, free. Even in the liquor stores that charge for them, they’re often cheaper than the cost of the printed check you buy from the bank. Money orders also give you some different protections against fraud that you don’t have with checking accounts.
Adam is wrong in his assessment of credit cards. Credit cards have real fraud protection, where debit cards leave you wide open, and only debit cards can create cascading / exponentially multiplying overdraft fees, charges, and penalties. Credit card users need only be sure to pay off their balance every month to stay clear of trouble. How difficult is that?