The Hidden Costs of Credit Card Rewards: How They Impact Consumers and Banks,

The Impact of Credit Card Rewards: Balancing Profitability and Responsible Credit Use


Credit card rewards have become a highly lucrative business for companies, generating over $140 billion in revenue in 2019. However, while these rewards entice consumers, they can also lead to debt accumulation. This article delves into the dynamics of credit card rewards, shedding light on their addictive nature, impact on low-income households, and the importance of responsible credit card usage. 

Credit Card Rewards: Tempting and Profitable, Yet Potentially Debt-Inducing

Credit card companies rake in billions through rewards programs, offering enticing incentives to cardholders. While rewards cards can save money if used responsibly, they can also lead to debt and increased interest payments. Responsible credit card management is crucial to strike a balance between reaping rewards and avoiding financial burdens.

Disproportionate Impact on Low-Income Households

Fees and interest rates associated with credit cards often disproportionately affect low-income households. Credit scores significantly influence annual and foreign transaction fees, creating a financial burden for those already struggling. Moreover, low-income households tend to carry credit card debt and face higher annual percentage rates (APRs), exacerbating their financial challenges.

The Value of Credit Card Rewards: Frequency and Balance Management

To derive maximum benefit from credit card rewards, frequent usage is paramount. Accumulating rewards requires regular utilization of rewards cards. However, it is crucial to be cautious when carrying a balance. Carrying a balance can lead to high APRs, ultimately nullifying the advantages of the rewards earned.

Incentives, Overspending, and Subprime Consumers

Credit card rewards programs often incentivize overspending and overborrowing, particularly for subprime and near prime consumers. Low-income cardholders exhibit higher delinquency rates, median balances, and collections. Subprime consumers, on average, earn a mere $1.80 in rewards but pay an additional $6.40 in interest annually. Consequently, there is a considerable wealth redistribution of over $15 billion from less educated to more educated individuals, poorer to richer individuals, and high to low minority areas.

Independently Profitable Rewards Cards: An Examination

Contrary to common belief, rewards cards are independently profitable and not cross-subsidized by interest payments. Customers with high FICO scores are cross-subsidized by rewards cards. The funding for rewards cards primarily comes from interchange fees and annual fees, not from interest payments made by cardholders.

Credit Card Interest Income: A Major Profit Source for Banks

For banks, credit card interest income serves as a significant source of profit. Capital One’s net interest income from credit cards was three times its non-interest income. However, the credit card business also poses risks, as evident from the nearly $4.3 billion provision for credit losses incurred in 2020.

Building Credit Responsibly with Secured Credit Cards

To establish a solid credit history, secured credit cards serve as a suitable option. Financial professionals advise caution regarding credit card usage for individuals who cannot pay off their balances each month. Secured credit cards, which require a deposit, offer an opportunity to increase credit limits gradually as cardholders demonstrate responsible financial behavior.

The Potential of the Credit Card Competition Act

The Credit Card Competition Act presents an opportunity to save $11 billion annually. This legislation mandates that credit cards issued by major banks be processed through at least two different networks. While some oppose the act due to concerns of inappropriate price control, alternative solutions, such as regulation or voluntary actions by banks, have been proposed.


Credit card rewards have transformed into a highly profitable enterprise for companies, while consumers are enticed by the allure of rewards. However, banks need to educate consumers on responsible credit card usage to prevent the accumulation of debt and interest charges. Low-income households are particularly vulnerable, facing disproportionate fees and higher APRs. By fostering awareness of these dynamics and encouraging informed decision-making, individuals can strike a balance between enjoying the benefits of credit card rewards and maintaining financial well-being.

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