Credit Card Winners and Losers

At a Sotheby’s auction in Hong Kong, a Chinese businessman used his credit card to buy a $36 million ancient ceramic cup. He got nearly 422 million American Express points.

I hope they don’t drop the cup.

On the other side of the transaction, American Express collects a fee from retailers that averages 2.5 percent per sale.

Credit Card Losers

Because retailers typically raise prices to pay their card fees, you and I helped to pay for Mr. Liu’s rewards points. But if we used a card that offers points for transactions, we still get something in return. Those who pay cash do not.

And that is the problem.

The less educated and less affluent you are, the more likely you will pay with cash or a debit card. However, the people who pay with cash or cash equivalents get nothing in return. Consequently, when it comes to credit cards, the poor subsidize the rich.

More specifically, according to a San Francisco Fed 2014 paper, as we move from an associate’s degree to a bachelor’s degree and beyond, we find an increasing preference for a credit card. Individuals with a four year degree are “three times more likely to prefer credit cards over cash.” Similarly, as we ascend the income ladder, so too does the probability that we will pay with a card. But the higher we go, the more we prefer a credit card over a debit card.

Our Bottom Line: The Regressive Impact

When lower income individuals suffer more of a financial hit than those who are wealthier, we can call the impact regressive. In addition, because the effect is felt by third party, it is a negative externality.

So, when Liu Yiqian used his Amex Card this month to buy a $170 million Modigliani painting, he created a regressive negative externality for those of us who have much less.