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Cash Only Consumers Pay For Credit Card Rewards

I’ve been fortunate never to have fallen down the hole of credit card debt. For those that have, it’s a very difficult situation since lenders, of all types, make more money the longer you’re in debt. Credit card debt is especially dangerous because it’s so easy to accumulate and the interest rates are so high. Consider the hoops you need to jump through for a mortgage, which is backed by an actual home, and the requirements of a credit card seem almost comical.

When experts recommend debtors go cash only, I think it’s prudent advice. I think it’s important to recognize your weaknesses and only do things that improve your life. If you can’t use a credit card without falling into debt and paying double digit interest rates, don’t use them.

The unfortunate downside of cash only is that you subsidize credit card users. You pay for my rewards. I’ve believed this for years but until a recent Federal Reserve Bank of Boston paper, I didn’t have hard data to cite. Here’s the report [3] but the gist is quite simple – cash only consumers subsidize credit card consumers because of higher prices. Specifically, a cash-using household pays $151 to card-using households and each card-using household receives $1,482 a year (that’s about half the average tax refund [4] for 2009).

How does this happen? A merchant has no idea if a customer is going to be paying with credit cards or cash so he or she has to mark everything up by the extra fees a credit card transaction would charge. When you pay cash, the merchant is happier because they keep the difference. When I pay with credit, that fee is already included in the price of the item. The difference is that with the higher fee I also get credit card rewards, which offset the additional, albeit invisible, cost.

Unfortunately, going cash only is a must if you know you’re irresponsible with credit. I think it’s a prudent financial decision, but it’s also important to recognize that you’re paying more for the people who do use credit. So if you’re anti-credit cards for some other reason, just remember you’re subsidizing the rewards of others.

(Photo: TheTruthAbout [5])