It’s that time again.  Time to hear how evil reward credit cards are.    They are so evil that they act like a “Reverse Robin Hood”.   We all know Robin Hood, the guy who steals from the rich and gives to the poor.   What could be worse than a Reverse Robin Hood, something that steals from the poor and gives to the rich.   You Bastards!

The Federal Reserve Sells It

The geniuses at the Federal Reserve Bank of Boston came up with a study that claims that reward cards actually take money from the poor and give to the rich.   I do not use the term geniuses lightly, as they include plenty of math like this:

Hence indeed.   The last time we looked at the Reverse Robin Hood argument was in response to the merchants fight against interchange fees.   You can read My Rebuttal To The Case Against Swipe Fees here.    Fortunately, the authors of the Fed report do not rely on interchange fees to support their conclusion as they write; “Our analysis of the transfers among consumers requires only the merchant fee and reward rate and not the inclusion of the interchange fee” (pg. 15).

With merchant sponsored interchange fee propaganda off of the table, the authors can go on to show with great mathematical detail how those who receive reward card benefits tend to be well off, while those who pay with cash are not.    Therefore, they conclude, the poor are subsidizing the rich.  This is too much for even a liberal like myself to swallow.   As I wrote about the Reverse Robin Hood theory when it applied only to interchange fees, this is an argument against credit cards and virtually all financial instruments:

The poor generally pay more interest and fees than rich.    This is true for almost all financial products from car loans to mortgages.    The reasons are obvious; wealthier people are both more financially literate and are less likely to default.

To put it more simply, I call BS on the entire Reverse Robin Hood theory as it applies to both interchange fees and credit card rewards.    Society can guarantee equality of opportunity but not the equality of results.   There are plenty of poor people who still own credit cards (like me when I was in college), and plenty of rich people who pay with means other than plastic.      We each have the opportunity to take advantage of reward cards, even if the result is that some do and some don’t.   If the authors of the study are correct in their analysis of the data, they make a pretty strong argument for being one of the people on the receiving end of the reward subsidy.  Your only takeaway should be to ensure that you are maximizing your rewards from your credit card portfolio, while never paying credit card interest or fees.

Unfortunately, they also reach policy conclusions that would be pretty nasty for us reward card aficionados, and believers in the free market in general.    For example, they propose the regulation of both interchange fees and rewards.   In wording that will cause the brains of Joe The Plumber and his supporters to explode they actually suggest a policy of “redistribution” of rewards through “tax deductions for reward contributions” (pg. 35).      They may be math geniuses, but they are completely tone deaf politically.

The New York Times Buys It

The financial blog at the New York Times links to the report.   They are so taken with the plight of the poor who, by paying cash, tend to miss out on rewards that they suggest:  “some ideas for what consumers can do now to alleviate any guilt they may have about using their cards everywhere” such as “using cash for certain purchases or at certain retailers” and “donating some of rewards each year to nonprofit groups that help the poor or giving up the cards completely.”

I am all for charitable giving, but when I walk into a store to exchange my hard earned cash for goods and services, I am participating in a business transaction.  I will not be using cash instead of my reward card in order to support the merchant any more than I will be giving them an extra 10% above the price because I really like them.   Any suggestion that people act so far outside their best interest to “alleviate their guilt” when purchasing goods and services is just nonsense.