The Benefits of Credit Card Rewards

Credit card rewards provide value to consumers and merchants alike, including lower-income consumers. The American Bankers Association (ABA) examined rewards cards and their value to various participants in the credit card market, including merchants and consumers, segmented by income and credit score.

The analysis, combined with other studies, finds that card rewards are accessible, valuable, and well-understood by consumers, across all income levels. Most lower-income cardholders use a rewards card and receive significant benefits from rewards programs, as do cardholders with moderate and higher incomes. Further, small businesses receive particular value from accepting rewards cards because they are associated with higher transaction amounts than cash-based purchases, and they also benefit from the improved transaction security, reduced fraud and nonpayment risk, and lower cost of handling cash that accompany electronic payments use.

• Merchants gain far more from credit card rewards programs than they pay in transaction fees. Through higher purchase values, increased security, lower risks, and avoided costs of cash, merchants benefit substantially from the existence of credit card rewards programs. There is little evidence that merchants pass the costs of card acceptance through to consumers — which is intuitive, given that the benefits of card acceptance outweigh the costs — so lower-income cash and debit users do not subsidize rewards through higher prices.
• Households of all incomes benefit from rewards cards. Most credit cardholders have active rewards cards, including more than three-quarters of balance-active cardholders with a household income less than $50,000. Rewards card ownership is determined primarily by credit score, not income.
• Most interest is paid by higher-income cardholders. High earners pay a disproportionate share of interest. While higher-income cardholders are slightly less likely to revolve than those with lower incomes, when they do revolve, they revolve larger balances.
• Credit card rewards are not a wealth transfer. Some credit card market observers use simplistic or misleading assumptions to argue that rewards programs act as a ‘Reverse Robin Hood’ subsidy from lower-income to wealthy consumers. In reality, credit card reward programs benefit consumers of all incomes as well as merchants who accept credit cards.
• Income has little bearing on a cardholder’s credit score. The relationship between risk score and income is quite weak, and the majority of lower-income cardholders have good credit scores. Similarly, interest rates are comparable within risk tiers regardless of income, suggesting that credit card pricing is based on risk, not income.
• Revolving balance and behavior are primarily a function of risk, not income. Risk score is far more important than income in determining whether a consumer revolves credit (and, in doing so, pays monthly interest).

ABA’s study will demonstrate to policymakers that the value of credit card rewards to consumers of all incomes, and that it will demonstrate that price controls (such as interchange or interest rate caps) would harm all consumers, especially those with lower incomes.