New Study Sheds Light on the Importance of Credit Card Rewards for Low-Income Households

A new study by the Electronic Payments Coalition (EPC) showcases how low- and middle-income households are acquiring and using credit card rewards at an increased rate. The study (which was based on a survey conducted by EPC) obtained information from credit card issuers, and included data on all issuer-branded consumer rewards cards but excluded data on co-brand, small business, and international rewards cards. One of the main takeaways from the report is clear: contrary to what is being said in support of the Credit Card Competition Act (CCCA), low- and middle-income (LMI) households frequently collect, redeem, and depend on credit card rewards. In some scenarios, these rewards might be even more impactful to LMI households than any other demographic.

Amongst the study’s key findings is the increase in credit card ownership amongst all demographics, and the increase of the number of credit cards offering reward programs. These increases were particularly noticeable in LMI households, where access to rewards credit cards rose from 62.2 percent to 69.2 percent in 2022. With this increase, the share of rewards credit cards offerings is nearly identical amongst the three demographics, with nearly 69 percent of all credit cards offered across all demographics being rewards cards.

Additionally, the report found that all three demographic segments earn and redeem a similar rate, with all segments earning around $1.83 in rewards per $100 dollar spent and redeeming between $1.75 and $1.79 in rewards per $100 dollar spent on average. While in absolute terms high-income households do receive a higher amount of money in card rewards, they only do so because they tend to spend more than other demographics. However, when controlling for spending, rewards cards are similarly rewarding for all cardholders regardless of income level.

Another important finding from the study is how cardholders decide to redeem their rewards. According to the survey data, LMI households overwhelmingly redeem cash rewards in comparison to other types of rewards (like travel rewards). For example, 64.3 percent of LMI household’s rewards were cash rewards, with only 23.1 percent being travel rewards. In comparison, middle- and high-income households’ cash redemptions represented 59.6 percent and 53.1 percent of their redemptions, respectively. Meanwhile, travel redemptions represented 26.5 percent and 34.3 percent of middle- and high-income households’ reward redemptions. These statistics indicates that LMI households are more likely to use their credit card rewards to offset high-sticker price spending like holiday gifts, back-to-school supplies, or mid-year vacations, while middle- and high-income households use their rewards for discretionary spending.

The report also disproved claims made by those who claim that credit card rewards disproportionally benefit high-income earners at the expense of LMI households. As the report highlights, some of the proponents of reward restrictions claim that because LMI households are supposedly more likely to be charged a higher interest rate, the cost of interest will offset the benefits of rewards programs. However, as the report shows, the correlation between risk score and income is nearly negligible, and LMI households do not usually face higher interest rates. The report also tackles the CCCA’s proponents’ argument that interchange fees’ have resulted in higher prices for customers, which would imply that cash and debit card users are bearing some of the costs of credit card users’ rewards. The report highlights that merchants’ benefits from accepting rewards cards usually outweigh their costs, with a net benefit of 5 to 6.4 percent. It also pointed out various cases, both in the United States and abroad, where restrictions on interchange fees did not translate lower prices at the counter. As noted above, the net benefit merchants obtain from accepting rewards card mean that they rarely need to offset these fees, and when they do, they usually do so through a surcharge that is only paid by credit card owners.

This report provides yet another example on how damaging a restriction on credit card rewards could be for the American economy, especially as consumers are increasingly relying in rewards to offset the impacts of recent surges in inflation. According to this study, more than $38 billion in unredeemed rewards could be potentially lost if these programs were to be wound down. This would essentially pull the rug on millions of Americans who are relying in these rewards as a safety net for unexpected purchases, or to take a much needed vacation as the summer arrives.