Personal Finance

The ethical case against credit cards and reward points is starting to gain traction

Being a good citizen today means continually looking at aspects of your life that work well for you but aren’t great for society.

Value judgments have to be made regarding the temperature setting on your thermostat, the kind of bag you use at the grocery store, how much meat you consume, the vehicle you drive and the distances you travel. Recent events suggest it’s time for a discussion about whether using credit cards should be added to this list.

By offering reward points or cashback to users, credit cards have become the most popular way to pay for things and a big money-maker for banks. But credit cards are also a force for inequality in that they suck money away from those who can least afford to pay their ridiculous interest charges and transfer it to the wealthiest. Consider this as you spend your way through the biggest shopping month of the year.

Credit cards offer a clear view of the financial stresses that built up in 2022. A recent survey of 5,000 or so cardholders by consulting firm MarketSense Inc. found that 35 per cent of participants regularly carried a balance on their credit cards. That’s up 5 percentage points over last year and is the largest increase in the 17 years the survey has been conducted.

“People are overextended on mortgages, and everything’s going up – food prices, gas prices,” said Lynda Lovett, co-founder of MarketSense. “They can’t make ends meet, so they’re just turning to their cards.”

Overall, MarketSense found that about 55 per cent of card users carry a balance regularly or from time to time. The puritanical school of personal finance says credit card interest rates are a tax on people who can’t control their spending. But even with ongoing efforts to improve financial literacy and the wide availability of credit counselling services, credit cards continue to be an emergency fund for people in financial distress. This is unlikely to change.

Interest paid by cardholders is just one way card issuers generate revenue. They also charge businesses fees to process card purchases and annual fees to holders of premium reward cards.

If you follow the money, you’ll see that households paying 20-per-cent interest on card debt incurred to buy groceries and a tank of gas are directly or indirectly helping to finance reward points used for flights, hotel rooms and high-end merchandise. Small businesses, some of them struggling to recover from pandemic lockdowns, help pay for rewards via card-processing fees that average 1.4 per cent per purchase.

As of a few months ago, businesses can pass along these processing fees to customers by adding a surcharge to their bills. The debate over these fees highlights the complexity of the role of credit cards.

Payments Canada says credit cards accounted for 33 per cent of transaction volume last year, compared with 30 per cent for second-place debit cards and 10 per cent for cash. I have argued against surcharges on the basis that credit cards are a basic financial utility, but small businesses make a good case for having cardholders bear the cost of their rewards.

Those rewards can be vitally useful if they help you stretch your budget by covering the cost of, say, groceries or drugstore purchases. But rewards are also a mirage that can lead to bad decisions. MarketSense has found that people who cannot pay their credit card bills often prefer to stick with reward cards rather than switch to cards with no rewards and interest rates of 12 to 14 per cent.

Using cash or debit is a way to work around the ethical issues with credit cards and control spending. But credit cards exist because they’re so useful – for buying online, booking travel and making big purchases. They allow you to track expenses and offer flexibility in the timing of purchases and payment. Also, using a credit card responsibly is an ideal way to build a good credit score.

What we need is a credit card system that more fairly distributes costs and rewards for users and card-issuing banks. Expect fewer reward points and cashback offers if we move in this direction. If credit card companies give businesses a break and offer better low-rate options, something has to give.

Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.

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