NEW YORK—New research shows that people with super-prime credit—those who have a FICO score of 780-850—on average earn $9.50 in rewards and pay $7.10 less in interest each month on rewards cards compared to run-of-the-mill classic cards.
Subprime consumers—people with credit scores below 660—earn just $1.80 in rewards and pay $6.40 more in interest, Vox reported, citing a new research paper from authors that include representatives from the Federal Reserve Board and the International Monetary fund.
“We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities,” the report states.
‘Naïve Consumers’
The researchers looked at two specific areas where what they call “naive” consumers make more mistakes with rewards cards: they overborrow, and they don’t pay their credit card debt in an ideal way, Vox explained.
“They focused on rewards cards that offer points, miles, or cash back for dollars spent; the data did not contemplate perks such as airport lounge access,” Vox said in its analysis. “On the first front, they took a look at bank-initiated credit limit increases on rewards cards, meaning instances when the bank says something like, ‘Hey, here’s an extra $1,000 on your credit limit, go nuts.’ They found that such increases led to higher unpaid balances among consumers with low credit scores — they upped their spending because they could, but they weren’t able to up their ability to pay that debt back.”
On the second front, Vox said the researchers examined people with multiple cards at the same bank and looked at how consumers addressed their different debts, finding low-credit consumers “tend to follow a sub-optimal (and costly) balance-matching heuristic when repaying their credit cards.”
For example, they focused too much on cards with higher balances and not cards with higher interest rates, where the debt would ultimately be more costly, Vox explained.
Paying the Price
Vox quoted one analyst as noting the issue isn’t necessarily that certain consumers don’t know how to best approach paying down debts and handling their rewards cards, it “may just be that it doesn’t really matter to them, or they’re not paying attention.”
“They may be so rich that they don’t care,” Vox quoted the analyst as saying. “It could be that you are unsophisticated and you don’t know, or it could simply be because of what economists call rational inattention; it’s rational for you not to pay attention.”
The Vox analysis added, “Whatever the case, when people screw up with rewards cards, they pay a price — and that price ultimately helps pay for the rewards of people who don’t.”
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