Credit Card Rewards: A Zero-Sum Game?

The credit card business has since been recovering since the Great Recession when banks drastically cut consumer lending as they scrambled to reduce risky loans. The number of people with credit cards has since increased, from 152 million in 2010 to 176 million in 2017. At the same time, the number of credit card accounts in the U.S increased from 386 million to 455 million in 2017. Alongside a modest increase in the average number of cards each person holds, more people are getting a credit card for the first time.

Once shunned for encouraging irresponsible spending, credit cards in the United States have since been hailed as a way to “save money.” From cashback to valuable airline miles, when accumulated—can theoretically pay for your flight and hotel stays. Extravagant sign-up bonuses, which require that a new cardholder spend a minimum amount in order to earn additional rewards, while generous point-reward systems incentivize the use of the card after the sign-up bonus was achieved.

In the end, though, someone is paying for your credit card rewards.

One upfront cost is the annual fee, which is typically charged at the beginning of the year and goes towards paying for administration costs. Credit card companies can also earn profits through the late fee and expensive 25% per year interest rates, one that can be avoided by paying in full the amount owed. 

A significant method credit card companies get their revenue is through interchange fees. Every time you swipe a card to pay, a portion of the total transaction is charged to the merchant and not the consumer. In general, high-end rewards credit cards charge higher interchange fees. American Express, with a more affluent customer base, relies less on its users falling behind on payments and thus charges a higher fee. 

In the Bay Area, many restaurants have implemented different strategies to offset these costs. After all, fees will further eat away at the razor-thin margins inherent in the restaurant business. Na Ya Dessert House on Geary Boulevard in San Francisco, for example, has a cash-only policy. The risk is that this method is less secure to theft, and may turn away diners who don’t have enough cash, leading to lost revenue.

Other restaurants may have to raise prices throughout the menu. While this simplifies the cost structure, it indiscriminately affects customers regardless of how they choose to pay. Here, it may be argued that people with poor credit scores, often with lower and unstable incomes, are disproportionately paying the most for the same products. 

Some establishments choose a middle ground. Gypsy’s Trattoria Italiana, a popular restaurant close to UC Berkeley, charges a 50-cent extra surcharge to diners paying with credit cards. While this incentivizes the use of cash, it creates a more complicated pricing structure, one that causes confusion.

Ultimately, if you are paying the annual and late fees, and if establishments are also charging you the interchange fee, you are paying for a large chunk of the points you earn. 

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