High costs are weighing down working-class families, while driving big rewards to rich ones. Over the past few decades, the credit-card market has quietly transformed into two credit-card markets: one offering generous benefits to wealthy Americans, the other offering expensive debt to the poor, with the latter subsidizing the former. While balances are compounding at the highest average APR in decades, a brutal 21.5 percent, the haves are not just pulling away from the have-nots. The people swiping their cards to pay for food and gas are also paying for wealthy cardholders’ upgrades to business class.
In the credit-card industry, the well-to-do are known as transactors. They pay off their balance in full every month, avoiding late fees and interest charges. They use credit cards as a convenient payment method, and as a way to earn travel points, cash back, airport-lounge vouchers, seat upgrades, and other goodies. Given how valuable these rewards are, transactors make money by spending money. “If you’re spending $100,000 a year, you’re getting maybe $1,500 back in terms of points or cash,” Aaron Klein of the Brookings Institution told me. “You’re not paying taxes on that. It’s worth closer to $2,500 or $3,000 a year in taxable income.” (That’s double the average worker’s weekly earnings.)
Banks could be losing money on transactors hoping they’d make it through different channels as well. That doesn’t change that boots theory can be seen everywhere and that system has been set up as it is by the wealthy.