Report Says The Poor Subsidize Credit Card Reward Programs

A new study from the Federal Reserve Bank of Boston says that credit card reward programs have a sneaky hidden cost that the card holder doesn’t have to bear. This occurs because the fee that a retailer pays to run a credit card varies with every card, and reward cards cost more to process–in other words, the card issuer passes the cost of the rewards program on to the retailer. The retailer adapts by raising prices across the board, which distributes the cost of the reward program among all shoppers.

This affects those who pay with cash the most, since they’re essentially paying to help subsidize a program that they don’t benefit from. And poor people tend to use more cash and fewer credit cards.

The New York Times quotes some actual figures from the report:

After accounting for rewards paid to households by banks, the researchers concluded that the lowest income household (those making less than $20,000 a year) pays $23 a year, while the highest income household (those making $150,000 or more annually) receives a subsidy of $756 every year.

As a result, the researchers wrote, reducing the transfers could potentially increase consumer welfare, and the transfers may be something that public policy makers may want to address.

“How Much Credit Card Rewards Cost the Poor” [New York Times via The Daily Beast]
Federal Reserve Bank of Boston report (PDF) (Thanks to Howard!)

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  1. keso444 says:

    Yes, but its the reward for being a good consumer. While the lower income household is paying into the reward system, the higher income households are buying a much higher percent of goods from those merchants. They are getting a small kickback and it may encourage more buying.

    • Echo5Joker says:

      ….which will then raise the price even further, so the poor people get shafted again.

      Trickle-up economics at work.

    • Awesome McAwesomeness says:

      Except that the so called “kickback” disappears when you factor in the fees the business has to pay because the wealthy want to use their credit card.

      And, making poorer people pay for your rewards does not justify these higher income customers and the stores basically profiting from the poor. There should be discounts for cash customers, not higher prices to make up for the people who use credit cards.

      • hansolo247 says:

        Every store is perfectly capable of offering a cash discount. It is not against any kind of merchant agreement AFAIK.

        Plus, every merchant can charge a different price to different people if he/she wants to. Price Discrimination is perfectly legal.

        If there WAS cash discounts…I’d use cash. While the Reward Trough is serving up the green, I’m eating from it. I pocket a few hundred bucks a year from it.

    • areaman says:

      I would have an easier time buying into this if the meaning of “good consumer” was not distorted.

      I pay no interest for my cards because I pay it off every month and I’m a “freeloader” in the industry.

      • hansolo247 says:

        So not true.

        A 30-50 day float where the full payment is a sure thing in return for a 2% charge? That is still extremely profitable.

        It’s like making a AAA-rated loan for a year and getting paid 15-20%. While many don’t think this, people that pay every month are good for a CC company’s business. The cash comes back so it can be re-loaned, they rarely ever take a loss, and they make 2% on every transaction.

    • kujospam says:

      Most rich people really don’t buy that much, thats why they are rich. They usually just buy stocks which a company then pisses on most of the time.

  2. Alvis says:

    The whole idea of “reward cards” is awful. Spending in order to get rewards is like thinking that you’re going to make up for your gambling losses by getting a few meals comped.

    • fs2k2isfun says:

      Sure, but if you are using the reward card to make purchases you would make anyway you can easily come out ahead.

      • akiri423 says:

        This. I use my Discover rewards card to make all of my purchases – and since I recently purchased a fixer-upper, some of those purchases have been sizable. I don’t pay interest, as I pay the card off in full each month, but reap the rewards.

        Apparently this also makes me a bad person.

        • Anonymously says:

          Because of rewards cards, the cost of goods has increased, so in order to save money, you have to use the rewards cards.

          It’s smart, but it also feeds the system. Using reward cards begets using rewards cards. Not that there’s anything that can be done to be stop it, but at least you now feel bad about it. (

          • obits3 says:

            True, but the injecting cash begets inflation. I don’t see many politicians saying that we should decrease government spending. This is not as simple as it seems.

          • Anonymously says:

            The last part of that statement (at least you feel bad about it) was sarcasm, btw.

    • pecan 3.14159265 says:

      I don’t spend in order to get rewards – I pay bills with my card because it’s more secure that way, and I put groceries on my card because I don’t like carrying around a lot of cash. The rewards are just a side benefit of my normal utilization.

      • Alvis says:

        I think it’s fair to say that MOST users don’t fit that pattern. If they did, it wouldn’t be in the CC companies’ interest to make these offers.

        • Necoras says:

          You’d have to define most. I would be willing to bet that better than half of customers carry a low or 0 balance on most or all of their cards. I’ve never carried a balance on a card that didn’t have a 0% interest rate (I currently have about $1300 on a 0% medical card from a surgery last year. I could pay it off now, but there’s not really a reason to.)

          There certainly are a large number of people out there who carry large balances on high interest cards, and for them rewards programs aren’t worth the trouble. They probably aren’t the reason these people are using credit cards either.

          For people like me (and a lot of the readers here) who pay off credit cards monthly, rewards programs are a good way to differentiate the various banks/CC companies and draw business. I funnel $30,000+ through my card every year. It’s all money I’d be spending anyways, and it’s nice to get some minimal return on that.

          • dragonfire81 says:

            Nowhere close I’m afraid. I’d be willing to bet the percentage of people carrying balances that do NOT get paid off at the end of month is 70 per cent or more and not all of them are idiots when it comes to finances. We’re in the middle of a recession, people are stretching to make ends meet.

            • johnva says:

              So if they didn’t have access to credit, wouldn’t they be even worse off? Which is worse: going into debt, or not being able to take your kid to the doctor or put food on the table?

        • Murph1908 says:

          I don’t think it’s fair to say that at all.

          I think your assumption that people spend only to get points is the minority.

          All my gas goes on my gas card, and I get $25 back about every other month. That’s almost a full tank. We had to put in new carpet in preparation to sell our house. The points on that get me half way to another $100 travel reward from Amex.

          If you spend money during the normal course of your life, why not get points?

          • Bibliovore says:

            At least some of it is competition among card-issuing companies for existing spending, rather than encouraging extra spending. I use my checking account’s credit/debit card only for the 10 purchases it takes to get 4% interest on that account each month. The rest of my purchases go on the card with the best reward program. I’m not spending anything extra, but the company whose card nets me the most is the one that gets the merchant fees from what I do spend.

        • lain1k says:

          Informed and responsible consumers do. I am the same way. I pay off my credit cards each month. I was doing that to build credit and it was more convenient than carrying cash. I figured if I was already using my credit card for purchases why not get 1-3% cash back. It’s an added bonus but not a reason to us my card over cash.

      • Cat_In_A_Hat says:

        Same here. I charge bills that I would normally pay out of my checking account every month, gas because of a 5% kickback, online purchases for security, and other large purchases that may need the protections that come with being a card holder. Small purchases or anything else that will instantly be used, gets paid in cash or using a debit card if I don’t have enough cash on hand. Credit card bills get paid in full every month.

    • Gandalf the Grey says:

      Although this seems to be the attitude of the government recently.

    • limiter says:

      Or… maybe you do what I do and charge everything on a CC that pays cash, not points, and pay it off every month and get paid a few thousand a year for the trouble.

      Retailers are not going to stop taking credit cards, and I bet if the government forced CC companies to remove all retailer fees not only would we have annual fees for holding credit cards, but retailers would keep prices the same and just rake in more money.

      • AustinTXProgrammer says:

        Retailers would likely lower their prices a bit, but who would notice a 2% drop when there are so many variations?

        Store A is still going to try and price below store B to gain customers. Store B will do the same, and the prices will stabilize where they make the most money. If the stores have lower costs, it will likely be a lower price point.

        • johnva says:

          Except that lots of markets have little or no competition, so that’s not true for them. Even if’s just a local monopoly we’re talking about (ie, a restaurant that is the only Thai place in town), there is no direct price competition to force prices down. That’s one of those things that is more true in theory than in reality.

          Prices are really set mainly based on what the market will bear. That’s not always directly related to costs. If there isn’t much competition, or it’s difficult for consumers to compare prices (true of almost everything in brick-and-mortar stores), then prices won’t necessarily fall in direct proportion to a reduction in costs.

          Furthermore, there are more variables in play. For example, it’s entirely possible that accepting credit cards increases the volume of business a retailer does. If that’s the case, then they might be able to get by on a lower profit margin on a particular product than they would if they didn’t take credit cards. If eliminating the credit card rewards programs caused fewer people to come into the store, they might actually make LESS money despite having lower costs.

          • JMILLER says:

            Competition for a Thai restaurant is not just a Thai restaurant. It is a grocery store, an Asian market, any other restaurant, a movie theater, a concert hall, a museum etc. The problem with too many businesses is, they limit their view of the competition.

    • Fineous K. Douchenstein says:

      Depends on how you look at the gambling. If you take $100 to the casino and blow it all, but you get your meal comped, perhaps you would have spent nearly that much on the meal anyway, and you certainly can’t win anything with food.

      • youbastid says:

        I don’t know what casino will comp your meal for blowing $100, but whatever low-rent casino that’s comping your meal for blowing $100 certainly isn’t going to be serving up $100 meals anywhere in the vicinity.

        • hansolo247 says:

          Couldn’t have said it better myself.

          Comps are based on time and wager.

          You could blow $1k on roulette in 1 second, and I guarantee you that you will NOT get a comp.

    • MaxPower says:

      No, as long as you don’t buy things just to get rewards it’s actually a great idea. You have to buy groceries and pay bills anyways so it’s nice that you get a little of that back down the road. If you were going to buy it anyways, and you’re going to pay off your card at the end of the month then the extra $100+ you get from the rewards a year is a nice little bonus. When you starting buying dumb things just for rewards or you have a high revolving balance that you’re paying a ton of interest on – that’s when you lose out.

    • johnva says:

      Except that if you pay your bill in full every month, it’s basically free money (or, more accurately, free discounts on all your purchases). Of course, you don’t want to spend more just because you’re getting rewards for it. But if you would have spent the money anyway, you come out completely ahead on a good cashback credit card. There is no offsetting “loss” to go along with the gains from the rewards.

      • Awesome McAwesomeness says:

        But as the article says, other people are subsidizing those rewards. Even people who pay in cash. How is that right? It’s like welfare for the people who are getting the rewards.

        • johnva says:

          There is nothing morally wrong about me simply availing myself of the existing system when I have no control over retailers’ pricing. It’s not my choice or problem if they choose to raise prices to compensate for credit card use (and I’m not entirely convinced that they do, because again, prices are not directly related to costs, and cash costs businesses lots of money to manage too).

          The argument is this: if credit cards weren’t “worth it” to businesses, they wouldn’t accept them. No one forces them to take credit cards, and there are plenty of businesses that don’t. The reason the majority do is that they benefit by accepting them. So what this basically boils down to is that the businesses want the benefits of accepting credit cards without having to pay for it.

        • mszabo says:

          I think the article is flawed. The poor are subsidizing by paying in case based on the assumption that if credit cards were not accepted everybody would just pay in cash and the retailer would make more money. If this were true then retailers would stop taking credit cards.

          They don’t because retailers make MORE money by accepting credit cards than they would otherwise. They are depending on people being more likely to buy with credit than cash.

          I feel bad for retailers having to pay high credit card fees, I really do. I get 1% cash back on all purchases when paying by credit. If the retailer wants to give me the 1% direct I’d pay cash and they’d come out 2% ahead.

        • Sarcastico says:

          Not any different from any other form of discount–coupons, mail-in rebates, instant rebates, 10% off for students, Wednesday Senior discount or Tuesday Ladies $5 off discounts, buy-one-get-one free or buy one, get 2nd half off or pretty much any other discount a retailer can throw out there to lure in the buyers. Anyway the poor get their rewards from the government by way of earned income credits, medicaid, food stamps, and so forth.

          • johnva says:

            That’s exactly right. Credit card rewards are a “subsidy” for their recipients on the backs of everyone else in the same sense that coupons are a “subsidy” for coupon-users on the backs of non-coupon-users. Only true if you consider a business nothing more than a conduit for money to pass from one group to another (a totally false assumption).

    • captadam says:

      I don’t spend to get rewards. I mean, I now have about 6,800 points that will be good for something like $68 off a hotel room. If I had bought those $6,800 worth of goods in order to get the hotel discount, then I would be a freaking moron. But I bought those $6,800 worth of goods–goods I would have bought regardless–with my rewards Visa rather than with cash or a non-rewards card so that I could get back 1 cent on the dollar a year or so later. And I never paid a penny in interest; those balances were paid in full each month.

      • Nigerian prince looking for business partner says:

        I do the same thing. I pay in full each month and use my credit card for most of my purchases. Every few months, I get a $25 or $50 gas card.

        • woahmelly says:

          This. Honestly, the only reason I use any form of credit is to reap the benefits gas cards and amazon.com cards to pay for books for school. Other wise, hello cash.

      • Awesome McAwesomeness says:

        So what you are saying is that you play the system costing stores/businesses, credit card companies,and other consumers money so you can get stuff for free. You are the credit card freeloader. You may be able to play the system to get your free stuff, but that doesn’t make it right. Getting free stuff at the expense of others in pretty crappy.

        • captadam says:

          Hey, piss off. Banks offer rewards cards because increased usage of those cards make them money. Retailers accept credit cards because acceptance of credit cards increases their earnings. And I play EXACTLY by the rules–I shop at retailers who accept my preferred form of payment, I pay the balances as specified in my cardholder agreement, and I accept the tokens the bank offers me as a reward for my participation in their offer. So, get off your high horse.

        • HoJu says:

          Thats probably the most ass-holeish nonsensical response that has ever been posted on Consumerist. Nice try, troll.

    • tbax929 says:

      My rewards are cash rewards. It’s money I would have spent anyway, and it’s nice to get some of it back.

    • myCatCracksMeUp says:

      Without even reading the other comments first, I’m going to say :

      “Haven’t you been reading Consumerist?”

      If you have you should know that many, many, many (that’s deliberate) of us charge everything and pay it off each month. Last year I charged over $92K on my Costco Amex. The largest monthly statement was for almost $15K, the smallest was arount $4K. Each month I paid it off if full. In February I got a nice Costco check for over $900. I used about $300 the next time I was in Costco, and was given over $600 back in cash, which I’ve been slowly spending when I’m in a situation where it makes sense to pay with cash. Actully I’ve gotten around $900 back each year for the last three years at least. And it costs me nothing.

      • sagodjur says:

        Which is exactly the point. It costs you nothing. It costs poor people proportionately more than it would cost you if it did cost you anything. I’m am happy for you that you make enough to be able to charge $92k a year on a credit card and pay it off each month.

        Do you think that you should be rewarded for making a lot of money by getting more money? Do you think poor people should be punished for making less money by having to pay more?

        I’m not saying people who are financially responsible should lament their good fortune, but at least have no illusions that you are in fact benefiting from someone elses misfortune.

        Having a good income in this economy and being financially responsible is it’s own reward.

  3. KillerBee says:

    What? So my free stuff isn’t really free? Shocking….

  4. obits3 says:

    Why don’t the poor get a credit card and pay it off every month. Eventually, you will get rewards. This has the same net result as using cash. There is not a financial problem. There is a psychological problem. People who don’t know how to use credit tend to spend more with credit cards. Thus, $23/yr could be seen as a “I can’t control my inpulse to spend more than I have” fee. Also, how is it my problem if I get rewarded for paying off my balance every month?

    • Mr_D says:

      Yeah, stupid poors. They should just stop being poor. Is it really that hard? Poor people should pay more because they’re poor.

      • obits3 says:

        @Mr_D
        I never said that. My logic is simple, if you have enough to live on a cash budget, then you can use a credit card to pay for the SAME stuff and build your credit. I started with a credit card that had a $250 limit. Start small. If you pay every month in full: your limit, credit rating, and even some free rewards will grow.

        • Echo5Joker says:

          I think you all are talking past each other. Obits3 is making it all sound a little too easy because he has a “it worked for me why can’t everyone do it” story. I know he’s at least fundamentally correct because it worked for me too, starting with a $500 limit eleven years ago and now having outstanding credit. However, Gandalf is correct also. Credit card companies don’t exist to build people’s credit, they exist to make money. While most of the reputable ones aren’t “predatory,” they do tend to have policies that are disadvantageous to poor people, who are more likely to use it as a “lifeline” in an emergency and get underwater faster.

          That’s not the real outrage with this story though. The real outrage is that in the form of higher fees to retailers for the credit card to pay the bill, the credit card companies are taking money from us and giving it to other people, essentially because those other people signed up. We could all maybe save a little money if they did away with it.

          • johnva says:

            It’s not entirely clear to me that we would all save money if the interchange fees charged by credit cards were just eliminated tomorrow, because it’s not entirely clear that this would result in a proportional savings to the merchants that would then be equally distributed in the form of lower prices. Pricing isn’t really related to costs so much as it’s related to what the market will bear. If the merchants can sell their products at a certain price right now successfully, they don’t really have a big reason to drop their prices if their costs suddenly went down.

            Furthermore, credit card acceptance saves merchants money in some other ways, such as reducing their need for secure cash management, reducing internal theft, etc. If the elimination of credit card rewards led to a reduction in credit card use (quite possible, since rewards are the only reason some people use credit cards) the merchants might have to deal with more cash again, which could end up costing them more money in various ways. So it’s not entirely clear to me that it would lead to greatly reduced prices. I think the effect would be very slight, at best, and probably only in very competitive categories of the market.

            • hansolo247 says:

              Don’t forget counterfeiting, too.

              while retailers moan non-stop, credit cards are a net win for them, too. They most certainly lead to higher average transaction amounts than cash, simply because the credit card isn’t necessarily a limited resource.

              I also agree it isn’t THAT hard to get into this game. Credit cards are a noose for many, and supplemental income for some. The key difference isn’t even necessarily income, as there are many in the six-figure club who are cash-poor living on the edge and many of smaller means who are quite disciplined.

              I know some people of smaller means, and they just waste money on the most stupid things. big gulps 2+ times a day, lotto tickets, paying to reconnect a phone each month…the list goes on.

    • Gandalf the Grey says:

      The problem with this attitude, is that most of the poor don’t qualify for a credit card simply for being poor.

      If they do qualify for a card, they won’t get the same type of rewards as someone who earns more money, they will pay a higher interest rate, simply because the credit card company knows they can’t spend as much in a year (so the card company won’t get as much in swipe fees), and they will likely be charged a huge annual fee just for the privilege of having a credit card.

      So, if a person who makes $20,000 a year, pays 15% in taxes, 25% to put a roof over their head, and 10% on an auto payment (none of these expenses normally allow you to use a credit card), that leaves about $10,000 a year for them to possibly spend with a rewards card.

      If they were able to get the best rewards card (according to Bankrate.com, the Costco American Express) then they would only be able to rack up about $125 in rewards for the year. Minus the $100 annual fee, equals about $25 dollars gained over the course of a year.

      That also assumes that the card company is willing to give them a credit limit of $834 ($10,000 divided by 12 months), and they had enough in savings to cover any unexpected expenses so they could make sure they could pay the balance off every month.

      Since most people making $20,000/year cannot afford to put much if anything in savings, and credit card companies are not going to give you a credit limit equal to your displosable monthly income unless you have great credit (Oh yeah, we forgot to factor in the years and years of losing money to bulid credit), the poor cannot benefit by simply getting a rewards card and paying it off every month.

      tl;dr version: We took a look at the math, and that won’t work.

      • Gandalf the Grey says:

        I also forgot to factor in the $50 a year membership to Costco for the best benefit card! That leaves us with a grand total of losing $25 a year, just to “make” money by using a rewards card!

        • johnva says:

          As I pointed out above, your example is a strawman. And now you’re making it even more ridiculous. Obviously, it’s stupid to do things that are stupid. That doesn’t make it stupid to use rewards cards when you’re NOT losing money.

        • Powerlurker says:

          Then just don’t get a credit card with an annual fee. If you aren’t a big spender, the Chase Freedom card is one of the better ones to get and it has no annual fee.

          • johnva says:

            Yep. I don’t understand what’s so hard about the concept of actually researching different credit card options and picking one that is optimally suited for your current financial situation and spending patterns. Obviously, you CAN idiotically waste money, but there is no reason you have to.

      • obits3 says:

        @Gandalf the Grey
        Please read what I said. Let me answer your objections:
        “most of the poor don’t qualify”

        How do you know that? I made less than $10,000 a year for a couple years and qualified. I paid off your balance every month and eventually I got rewards. I have never paid a fee, but then again, I pay my balance in full every month.

        “they will pay a higher interest rate”

        Only if they have a balance, did I not make it clear that you “pay it off every month”?

        “they will likely be charged a huge annual fee”

        Only if they have a bad credit history (i.e. not paying other cards) or want too many rewards too soon.

        “Oh yeah, we forgot to factor in the years and years of losing money to bulid credit.”

        I only used my card on things that I was already going to buy! It has the same effect as a cash budget!

        • Gandalf the Grey says:

          @Obits3
          ———–
          “they will pay a higher interest rate”

          Only if they have a balance, did I not make it clear that you “pay it off every month”?
          ————
          You did specify. If you were able to pay off the balance every single month without exception, that’s great! You really managed to do well and be on top of things. No sarcasm there. But, most people cannot. They have a month where their car breaks down and they need to get it fixed, or they break a tooth and they have a large dental bill they didn’t expect. If you end up in a month where you have a larger bill than expected, and you all of a sudden don’t have enough cash at the end of the month, then the credit card is the last thing to get payed off in most households.

          —————
          “they will likely be charged a huge annual fee”

          Only if they have a bad credit history (i.e. not paying other cards) or want too many rewards too soon.
          —————

          What about the time it takes to bulid a credit history. When you apply for your first card, you don’t have a good credit history. College students for example, will likely have no credit. Almost all of these cards have annual fees. I have seen the advertisements for the cards without, but most of these are little more than bait and switch. Once you authorize them to look at your credit, then they will tell you that you don’t qualify for the advertised card, but that you will be given a card with much less favorable rates instead.

          Since building good credit takes time, you will have some time where you don’t qualify for the top of the lines rewards card. During this time, you will end up paying more and getting less in rewards.

          That’s the real beauty of their system. They have made it so you have to pay them in some way or another.

          • obits3 says:

            “you all of a sudden don’t have enough cash at the end of the month”

            That’s what I am talking about. It is not the credit card companies fault. I’m not saying that it is a good place to be. I’m just saying that the problem is due to a lack of funds, not due to having a credit card. Also, let’s think about your example:

            “They have a month where their car breaks down and they need to get it fixed…”

            What happens if they don’t have a card? Do they take the bus for a while? Do they not go to work? You see, while the card does have high rates, this person might be in a worse place without a card. Also, they should have budgeted the cost of repairs over time, so this would be an educational issue, not a credit card issue.

          • johnva says:

            There are plenty of cards available that have no annual fees. If all you’re looking to do at first is build good credit history, you don’t need one that offers ANY rewards at all, and you can find one with no annual fee. Such a card might have some other drawbacks like a high interest rate, but the interest rate doesn’t matter if you just pay it off in full every month. As I said above, you do not ever need to spend money (beyond what you would have spent anyway) in order to build credit history. Sure, there are plenty of ripoff cards out there. So, duh, you avoid those.

        • dragonfire81 says:

          The problem is most people who are poor don’t have the financial brains to pay it off every month. They see the $15 minimum on the statement and think “Great! It will only cost me a little bit to get this bill paid for the month!” they don’t think about the interest rates or the fact that paying the minimum really doesn’t get you anywhere.

          I would say a high percentage of card users DON’T pay in full every month, even people who consider themselves financially responsible.

          • johnva says:

            These people are adults. If they choose not to understand the serious contract they are entering into, it’s not really anyone’s fault but their own. If you can’t grasp the concept of compound interest, credit is probably not really a good idea for you. Adults are supposed to be responsible for their own financial and contractual choices in our society.

            There’s even less excuse now than there was in the past, because the recent reforms have changed things so that the credit card companies have to give people detailed and clear information about how long it would take them to pay off their balances on various payment plans.

          • jessjj347 says:

            It had nothing to do with brains. Most low-income individuals have potential unreimbersed medical bills to pay, child support, expenses like rent, utilities, etc. Basically, it usually comes down to a choice to pay certain things, as in they can’t afford to pay all. If a credit card has a minimum balance of $15, and it means putting food on the table, then they’re going to pay the minimum

            • johnva says:

              Except that that IS showing a lack of financial planning, because they would be able to dig themselves out of that situation more easily if they did a little more long-term thinking. Sure, you might make it through a month by paying only the minimum on your debt…but in the long run that means you would end up paying more. It would make it harder to get through the NEXT month, and so on, if you’re just digging yourself deeper into a hole. If you’re using credit in that way, all you’re doing it just delaying the inevitable point at which you can no longer pay your bills. There’s always bankruptcy as a way out, but if they weren’t doing that in the first place they could actually be using credit to make it EASIER to pay their bills rather than harder (for example, by playing the rewards game). Plus, when you have a good credit history a lot of things become cheaper (mortgages and therefore housing, insurance, etc). Plus, since they have less total disposable income, the poor are the ones who can LEAST afford to throw away money on interest payments. They MOST need to plan their finances carefully.

      • Fineous K. Douchenstein says:

        As long as someone who is “poor” can find a card with at least minimal rewards and no annual fee, doing what obits3 suggested produces results. If you pay the card off every month, it doesn’t matter what the interest rate is whatsoever.

      • johnva says:

        Your whole “explanation” is faulty in quite a number of areas.

        1) Credit history is not tied to income level, but to your history of reliably using credit and paying your bills.

        2) It doesn’t cost money to build a credit history if you’re smart about it. I’ve built an excellent credit history without paying a dime in interest. It does take time, but not THAT long (you can usually qualify for the best cards after a couple of years of perfect credit history).

        3) Credit card companies routinely increase credit lines without knowing exactly what the person’s income level is. At one point in grad school I had access to credit lines greater than my annual income.

        4) That is FAR from the “best credit card” out there. I still have a credit card that gives me 5% cash back on gas, groceries, and drugstores (it’s not offered anymore, but they have so far let me keep it active). If those categories compromised a large portion of your hypothetical person’s $10,000/year in spending, they would make more like several hundred dollars in rewards, rather than $25. Your “example” is a strawman constructed specifically to make what you’re opposing look stupid. Even if you can’t get a card as good as mine, you can do a lot better than 0.25% (since there are TONS of good cards with no annual fees).

        • Echo5Joker says:

          Then why have I been turned down for credit cards for not making enough money, despite a credit score near the top of the scale?

          • obits3 says:

            That sucks. Maybe you could ask for a smaller credit limit. I hope you find a good card.

          • johnva says:

            It’s up to individual banks to use whatever criteria they want when issuing credit. If they want to use income in addition to various other credit scoring measures, they can. But income is not a direct factor in your credit score, which is what I’m saying, and additionally the acceptable income threshold they use may vary depending on other factors. Just find some other bank or card for which they don’t have an income cutoff. I guarantee you that there are plenty out there.

        • nerdwallet says:

          I would also add that there is not a $100 annual fee for that card. If you have a Costco membership (for which you pay $50/yr), the card itself is free.

    • johnva says:

      Agreed. Credit history is not necessarily tied to income. I don’t have a high income, and I have an excellent credit history. You don’t have to spend a lot to get access to the “good” rewards credit cards…you simply have to be reliable about paying your bills, and refrain from using up all of your credit limits. All you have to do to accomplish that is avoid overextending yourself by spending more on a credit card than you can afford to pay back that same month. The same strategy can scale completely by income.

      What I think CAN be a problem associated with being poor is not having a RELIABLE income stream. In that case, it’s probably smarter to save up some cushion over time before using credit for daily purchases, just so that you don’t get into trouble if something unexpected comes up.

    • Ce J says:

      Why don’t the poor just eat cake?

  5. PixDawg says:

    Well, since I am already supporting the poor with endless government programs supported by my taxes and since my wife spends several afternoon working at a food bank, we really do NOT feel guilty about an damn thing.

    I am SO tired of liberals telling me how going about my life and taking care of my family is somehow abusing the poor.

    • Mike says:

      WOW. Can try to re-phrase that without sounding like a complete and total condescending, selfish douche bag?

      • obits3 says:

        I’m glad that you concentrate on the way something is said and not the substance.

        Who cares if the ideas are good, all that matters is that I am not offended./sarc

        • Anonymously says:
        • Mike says:

          The ideas are so preposterous, they are not even worth addressing. If this guy had any sense at all he would have railed against the subsidies we give the big business and the military industrial complex first. How about all those anti-trust exemptions that cost us money? No bid government contracts? All these things dwarf the supposed “liberal” programs he took a shot at.

          No, this guy was a douche bag. And if he hates government subsidies he should take shots at all subsidies, not just the ones aimed at helping poor people.

          Socialism for the rich and capitalism for the poor. That should be the new mantra for the right wing. http://en.wikipedia.org/wiki/Socialism_for_the_rich_and_capitalism_for_the_poor

          • obits3 says:

            I think that he aimed his argument at poor subsidies because the article seemed to say that society is taking from the poor without them getting anything back. I agree that there is a lot of government waste; however, who is paying for that waste? Our tax system goes from extremes around 50% to the very poor paying no tax and getting money (i.e. a negative tax rate). I do believe that we should help the poor, but I can see why someone would be upset that they do a lot for the poor, but all they hear is “it’s not enough, we want more” from the media. It is a never ending cycle.

    • MamaBug says:

      I’M sick and tired of the use of liberal=bad. Here you go, the definition of liberal from dictionary.com:

      favorable to progress or reform, as in political or religious affairs.

      favorable to or in accord with concepts of maximum individual freedom possible, esp. as
      guaranteed by law and secured by governmental protection of civil liberties

      open-minded or tolerant, esp. free of or not bound by traditional or conventional ideas, values, etc.

      free from prejudice or bigotry; tolerant: a liberal attitude toward foreigners.

      —Synonyms
      1. progressive, broad-minded, unprejudiced, beneficent, charitable, openhanded, munificent, unstinting, lavish. See generous.

      • Anonymously says:

        Ad hom: The easiest way to “win” an argument.

        “I declare you a liberal, therefore everything you say is wrong”.

      • Xenth. says:

        Liberal and conservative positions have little to do with their dictionary definitions.

      • Awesome McAwesomeness says:

        People who do this do it because they are lacking an intelligent argument, or couldn’t think of one if they tried. They think if they issue a scathing word at you, like liberal, that you will somehow shut up. If they had an intelligent argument, then certainly they wouldn’t have to resort to trying to put you down.

    • ARP says:

      Funny, I’m tired of my tax dollars supporting the rich, with oil subsidies for companies making billions in profits, war-profiteers from our unneccessary war, bailouts for the banks, government supported monopolies, a highly politicized supreme court, etc.

      • Awesome McAwesomeness says:

        No kidding, I too am sick of the same things–especially credit card freeloading. If I got a 5% discount for using cash, I could save about $400 a year on groceries alone. That doesn’t count all of the clothing, shoes, haircuts, etc… that we pay for. Instead, I have to subsidize other people being rewarded out of my hard earned dollars.

        I think its’ really sad how the rich get richer on the backs of the poor, then justify it with a lottery ticket/cigarette/social services comment.

        • johnva says:

          You don’t *have to*. You could always get a rewards card yourself, assuming you haven’t screwed up your credit profile in the past.

    • Awesome McAwesomeness says:

      I’m not poor, do not receive low income government services, nor do I have credit cards, so basically, since we spend more money than the poor, I am paying more money into your credit card freeloading.

      You are getting what you are getting at the expense of everyone else. Having a family to take care of is no excuse since I presume you are not destitute (your vapid dislike of social services for the poor is the giveaway there.)

      I love how people will justify the crap they do someway somehow.

    • areaman says:

      A report is published on how the credit card business works and people personalize it so they can be offended.

      Jim Baker III is 100% correct in saying political debate today is far off target (speech at the Commonwealth Club in the spring of this year ).

      It’s true many Americans pay a lot of taxes. And at the same time the NY Times or the Federal Reserve Bank of Boston is not telling PixDawg to do anything.

  6. MonkeyMonk says:

    I got back over $700 last year in CC rebates (made a few big purchases and was able to put them all on my CC before paying them off in full a couple weeks later).

    Sorry that’s on the backs of the less well off. Between this and the lottery tax the poor often get a bum deal that’s not always readily apparent.

  7. AllanG54 says:

    Yeah, and after 14 years in collections at previous jobs I found that it’s the poorer people (low income, college students) who run up their credit cards the most and then don’t pay. My wife’s son is going to college next month and has NO job or income and yet he’s been solicited by two different credit card companies already. You tell me how he’s going to pay them back if he runs them up. People who pay deserve a little something extra other that higher interest rates.

    • fatediesel says:

      If your wife’s son is under 21 then he cannot legally get a credit card unless he has a co-signer. As of February credit card companies cannot give a card to someone under 21 unless they have a co-signer or can prove they have the income to pay the bills, which would not be the case in your wife’s son’s case.

    • obits3 says:

      Think about it. What would the poor people do if they did not have credit cards.

      1. If they could get by on cash, then why all the fuss about running up debt.
      2. If the couldn’t get by on cash, then wouldn’t a world without credit cards leave them high and dry?

      Remember, I you can get by on cash, then you can use a credit card and pay it off every month. Running up a balance would then be caused by spending more than you would on a cash budget, and who’s fault is that?

    • Gandalf the Grey says:

      The blame for that Sir, lies in the credit card companies that are soliciting your wife’s son.

      They are knowing sending a credit card, to someone who cannot pay it.

      If they lose money because they give him a card, and he skips on the bill, they, and their stockholders should eat the entire cost, and if they do this too much, they should go out of business.

      Corporate responsibility needs to make a comeback.

    • Awesome McAwesomeness says:

      How do people who bring in no money to credit card companies, and cost businesses and consumers money deserve anything? People who pay their bills off at the end of each month are the bane of the credit card industry.

      I can’t believe people think they “deserve” something for being responsible and doing what they should be doing–being financially responsible. Especially since they are getting it off the backs of everyone else.

      • nerdwallet says:

        On the contrary, people who pay their bills off every month earn the credit card companies plenty of money in the form of merchant fees. These merchant fees are actually the reason that the Fed argues that everyone has to pay higher prices due to credit card rewards.

        And of course people should be rewarded for being responsible. If we rewarded people for being irresponsible, where would we be exactly?

  8. Supes says:

    No surprise at all. Until merchants are allowed to give cash discounts or force credit card premiums, this will continue. But the new ability for merchants to refuse a credit card for purchases under $10 should help a little.

    It is a very counter-intuitive system. One of the original rationales of the credit card was for convenience. Nowadays I use my credit card for almost everything, but it’s not a convenience issue at all. It’s because I get 2% cashback on everything. I know I’ll stop using my card in a second if they (a) get rid of the rewards, or (b) start charging me an annual fee.

    So basically card providers need to give rewards to get people to keep using their cards. A credit card’s new purpose for many has become a way to earn a free subsidy on all purchases.

    • Liam Kinkaid says:

      They already are allowed to give cash discounts. In fact, that’s how they have to display a disparity in price between cash and credit as a “cash discount”. The fact that many of them don’t is telling. Credit card users tend to spend more than cash users. A goodish percent of credit card customers are probably statistically more money savvy than cash customers. Therefore, if more merchants offered a cash discount, more people would pay in cash and would tend to purchase less.

      • frank64 says:

        They were allowed to but it was very hard to do. The new financial reform act allows them to do it more easily. This is something they fought for, so you will be seeing it.

        The merchants pay more for the rewards cards and wanted a way to have the choice to accept them or not, or at least allow for differing discounts for different charge products, say a 1% discount for using a credit card without a reward, but they didn’t get that. Now a merchant has no choice but to pay the higher rates of the reward cards. The banks get the benefits of their marketing program, and the merchants/us pay. Sweet for them.

        • johnva says:

          So all you have to do is game the system. You win too as long as you don’t voluntarily give your money to the banks.

          • frank64 says:

            Having to game the system is unfair, especially for those that can’t, or don’t want to.

            • johnva says:

              Anyone can do it if they just are smart about it and do a little research. All they have to do is educate themselves; doing so is very easy nowadays thanks to the Internet.

              As for not wanting to, it’s not my problem if someone chooses not to do something that would benefit them. How is it “unfair” if someone has the ability to save themselves money, but doesn’t “want” to?

      • captadam says:

        Exactly–retailers accept credit cards and the associated fees (despite complaining about those fees) because doing so increases sales and, therefore, profits.

      • Eifnor says:

        I prefer to pay cash for my purchases and often ask for a cash discount. I’m normally offered 2% at best, but mostly I am dealing with someone who doesn’t have the authority to give a discount. Come on merchants; make it rewarding to pay cash.

  9. EverCynicalTHX says:

    The ink is barely dry on the Financial Reform bill and now that the government has control we get statements like this:

    “the transfers may be something that public policy makers may want to address”

    • Jeff_Number_3 says:

      There’s 2 mays in that statement… it might become a problem, and if it is a problem, we might want to look at it.

      If someone is going to research something, they need to be more firm in their conclusions.

  10. punkrawka says:

    If the government really wants to get rid of things that actively economically discriminate against the poor, it needs to start with its own regressive taxes (lotteries, and tobacco/alcohol/sales taxes) before it goes and hypocritically starts to monkey around in a market that’s having the same effect only indirectly. The government isn’t even trying to hide its own tactics of doing the same thing.

    • myCatCracksMeUp says:

      Thank you!

      • hansolo247 says:

        don’t forget the more all-encompassing agenda item…fast food and/or sugar taxes. People with means will often eat healthier food and little sin taxes simply don’t proportionally affect them.

        That’ll hit the poor really hard, though. A nominal 5% means 1-2 meals LESS PER MONTH than now.

  11. sagodjur says:

    I knew the second I read the headline that this forum would, sadly, be filled with self-righteousness and preaching about d.i.y. financial responsibility. “I pulled myself up by my bootstraps, and so can you!” Basically the credit card rewards program is like you getting a quarter from the bum on the street instead of the other way around. If you can’t see what’s wrong with this…well, I don’t think there’s any hope for your conscience then.

    • Mike says:

      Here, let me do my self-righteous, right wing douche bag impression for you:

      “Look all my tax dollars should not go to spending on helping poor people. I want my tax dollars to be spent on bombs and bullets that kill people who are preferably brown and of a different faith than me. Oh and give tax cuts to millionaires, because even though no economist who can use a calculator correctly has even been able to show that supply side economics work, I am still going to support more tax cuts for the rich. Because like, the rich need the money to throw at the middle class.”

      • obits3 says:

        Since we’re doing stereotypes, let me try my self-righteous, left wing douche bag impression:

        “Look at all these tax dollars spent on national defense. Who cares if one of the main reasons for having a federal government is the mutual defense of the states? Everyone should understand what I believe, and by understand, I of course mean that they cannot disagree with me without me calling them bigots or unknowledgeable on national TV. Also, we should tax people more just because they have more money. What? The original constitution seemed to be against such type of taxing? I don’t care. While we’re at it, why not tax gifts and inheritances? Who cares if that is double federal taxation? As for the law, I make the law. The courts say my law is unconstitutional? Screw them; I’ll just make another law that basically does the same thing.”

        All in good fun, of course.

        • 47ka says:

          The original Constitution did not have a Bill of Rights, hence why they are Amendments 1 – 10.

          • obits3 says:

            @ 47ka
            First off, what does the Bill of Rights have to do with the form of taxation shown in the Constitution for over 100 years?

            Secondly, while they are amendments, they were “ratified contemporaneously” in order to get the states to agree to the constitution, so in substance, they might as well be part of the original as passed.

            http://en.wikipedia.org/wiki/United_States_Bill_of_Rights

    • zibby says:

      LOL, nice work – you perfectly captured the tone of scolding petulance with a hint of self-pity common in genuine posts of this nature; your use of the term “bum” instead of the more politically correct “homeless” or technically incorrect “hobo” was a (deliberate?) giveaway, however. Still, that might be for the best – on the internet it’s often unwise for parody to be too veiled.

  12. wcnghj says:

    I’ve said it a million times. If the merchant banks removed interchange fees, prices would not go down for anybody.

    • johnva says:

      What people forget is that a) businesses actually make more money by accepting credit cards in several ways (they attract more customers, have less internal theft, easier cash management, etc), and b) prices are not actually directly related to the costs of doing business. So if credit card interchange fees suddenly went away, prices might not actually go down by the same amount because stores price goods and services at the price the market will bear. If they thought they could get away with not passing the reduced cost of business on to customers, they wouldn’t pass it on. And since many merchants are not exactly operating in an ideally competitive free market, many would be able to do that.

      Bottom line: it MIGHT reduce prices slightly, at some places, but it wouldn’t be a dramatic change.

      • hansolo247 says:

        Exactly. A 99 cent item will not drop to 97 cents. It is 99 cents because people will pay it, and that won’t change.

        Bigger ticket items may see a decrease, but if it sells well for 299.99, it will still be 299.99.

  13. zibby says:

    Good to see some of this crap works out in my favor.

  14. Murph1908 says:

    In other news:

    The cost of theft is passed on to customers who actually pay for their merchandise

    The cost of frivolous lawsuits are passed to customers who manage to notice the spill in the isle.

    The costs of reckless and shitty drivers, as well as the costs for uninsured motorists, are passed onto responsible drivers.

  15. oxbox says:

    I hate that the focus of this story is on “the poor.” Why not just say that people paying cash are supporting the credit card rewards programs? Going through multiple layers of the poor not using credit cards and the “rich” using credit cards to deliver the final theory that the rich are stealing from the poor is specious at best.

    When I was in college, I had credit cards. I signed up with them for the rewards. I paid my bill in full each month (despite being poor).

    I also know several very wealthy families that don’t even have credit cards. They just use debit or cash.

    In the end, the writer of this article is just preaching to the guilt of the supposed “rich.” It just turns me off to the whole story. On the other hand, if the author had focused on the fact that people paying with cash are charged more, I would be inclined to take sides with the author.

    • obits3 says:

      Thank you for pointing this out. Credit Card Users != rich.

    • evnmorlo says:

      We never hear the costs of cash either. All that cash handling with register surveillance, safe drops, and armored cars must cost something, not to mention transactions taking 50% longer.

      • obits3 says:

        Good point.

      • SideshowCrono says:

        But, ha ha!, if credit card transactions are FASTER then you need fewer workers to process the same backlog of customers…

        THUS credit cards are a tool of the rich to keep the poor unemployed! I KNEW IT!

        Let’s go find a rich person and beat them. I would but I live in Manhattan and there aren’t many of them around here…

    • crazy_butch says:

      Part of my job requirement is to solicit the store credit card. (Don’t worry, I don’t push beyond someone telling me no to my first request.). Some lady told me she didn’t want a credit card because she couldn’t afford it. I pointed out that she could pay it off in full each month and just reap the discount benefits, and receive a better credit score. I told her that’s what I do, and she said “you must be rich”. We make less than $30K a year, my husband and I combined. We just… don’t buy more than we can afford…. and we get benefits. I resent that people think I’m a stuck up snob because I have a credit cards.

  16. Talisker says:

    This is why I want credit card fees to be a separate line item on receipts. I wonder how much inflation in the cost of consumer goods in the past ten or twenty years is a result of merchant fees and not other market forces?

  17. Big Mama Pain says:

    This is such a “so what” article. The poor get financially screwed over pretty much across the board. Instead of railing against rewards cards, why not highlight all the fees merchants pay for jackasses who use their cards for a $1.50 soda?

  18. Tim says:

    Breaking news: capitalism takes advantage of the poor for the benefit of the rich.

    You know, I think some guy may have figured that out around 1848. His name was Karl something … something with an M.

  19. Nigerian prince looking for business partner says:

    It’s very easy to calculate the cost of accepting credit cards but how much do cash only customers cost businesses?

    Counting change, slowing down lines, hiring the armor car company, transferring money to-and-from safe, the liability of having extra cash on premises, counterfeit money, etc. all add to overhead.

  20. evnmorlo says:

    Stores charge the maximum price that people will pay. If credit cards were never invented prices would be exactly the same (or higher since they’d need more cashiers to handle to deal with the enormous delays caused by checks).

    Poor people usually buy convenience foods in small quantities, which increases their grocery bills enormously. Retailer pricing schemes and sales tax are much more exploitative than this nonsense about credit card rewards.

  21. jeanniez says:

    Think of like this. Sure you are getting your $700ish in rebates/gifts a year but the merchants you deal with day in and out are essentially paying for it. Merchants have to pay more when you use the rewards cards as opposed to just a plain card. And the banks are taking a cut too, they make much more that you get back overall, I’m sure.

    So we frame it as us taking from the poor but it is really the banks taking from us simply because they can. They pay off some customers but the rest are branded as deadbeats so no one cares about them.

  22. failurate says:

    So the real story is that poor people need reward cards too?

  23. joetan says:

    What’s irritating is that businesses have been screaming about this forever and it was the same old -stop bitching you gouger hate on the business guy- type responses.

  24. yikes says:

    I haven’t read the articles, but it is very possible that the reward credit card users actually pay more than the cash payers (possible much more). For instance, rewards credit card users are susceptible to interest charges if they pay the minimum each month. Also, some rewards credit cards have fees associated with using them (i.e. maintenance fees, associated membership fees (think membership clubs), reward redemption fees, foreign transaction fees, reward recovery fees, activity fees, payment protection fees, paper statement fees, etc.).

    • yikes says:

      I believe the assumption in the articles (again, without reading them) is that they are comparing cash payers with credit card payers who pay no fees associated with using their rewards credit cards, pay no fees for redemption of the their rewards, and pay off their balance in full each month.

  25. hosehead says:

    Thanks!

  26. DragonThermo says:

    Considering that the poor get all the breaks that I don’t get. I not only have to pay for my own food, and the gov’t subsidies that keep food prices high, but I have to pay for food stamps for the poor to get their food free or cheap. Not only do I have to pay for my own lodging, but I have to pay for the gov’t subsidies that give free/cheap housing to the poor. Not only do I have to pay for my own health care and insurance, but I have to pay for the poor to get free healthcare (federal, state, and local gov’t programs). I have to go to work every day to pay for all these things for myself and a third or more is taken away and given to the poor so they can stay home and watch Oprah.

    It’s about time that the poor pay their fair share and give me a measly 1% cash back for all that I buy to give them a life of leisure.

  27. wadewood says:

    Retailers could solve this by simply offering a cash discount. Instaed of paying 3-4% credit card processing fee, offer that 3-4% to customer as discount for paying cash.

    I use my credit cards all the time and pay them off fully every month. One store I visit offers a 5% cash discount and I always pay cash at that store.

  28. wadewood says:

    Retailers could solve this by simply offering a cash discount. Instead of paying 3-4% credit card processing fee, offer that 3-4% to customer as discount for paying cash.

    I use my credit cards all the time and pay them off fully every month. One store I visit offers a 5% cash discount and I always pay cash at that store.

  29. grimJack says:

    Dang, this reminds me; I gotta use some points I earned recently.

  30. hansolo247 says:

    I knew this already.

    Free checking is paid for by all those who overdraft. No difference.

    Bottom line is that it is extremely easy to join the club of people that use Credit Cards as an income source (assuming you don’t buy EXTRA).

  31. MyopicRaiderfan says:

    If coupons were banned would the cost of cereal or any other product go down? Isn’t it fair to say that those that seek out the best deal will get the best deal?

    If you have cash, request a cash discount.
    If you have a rewards card, use your rewards card.

    Even if you are poorer than most if you manage your money well you can get credit.

  32. LACubsFan says:

    Great study! Too bad things are all gonna change when the new financial reform goes into effect.

  33. Sam25961 says:

    Merchants have always been able to offer discounts for cash – both by federal law and in all agreements with card networks. But as this study shows, very few merchants take advantage of this option – clearly opting to keep the difference for themselves in the form of higher profits. It is, in fact, retailers themselves who are forcing cash users to pay more than necessary by not offering them a discount – and in effect, paying for those who pay with credit. Cash users should insist on discounts at their retailers. Nothing is prohibiting merchants from offering discounts for cash – they simply don’t want to do it.

  34. Geekybiker says:

    Just make shelf prices cash prices, and let consumers know they’ll be paying the processing fee extra. I bet CC use will dry up alot when people see the real cost of credit.

  35. tacitus59 says:

    Oh yeah …lets blame the rewards instead of blaming the credit card industry in general. What store should be allowed to do is pass the credit card fees directly to you when you buy something on credit. In particular stores should be allowed to post the rates they are forced to pay for a particular network. As confusing as it is that would also allow visibilty into the industry. Cash discounts are fine – but they are hardly ever used and full disclosure is better.

  36. nerdwallet says:

    While everyone seems to have ideological opinions one way or the other on this issue, no one has actually stepped back and questioned the math.

    In order for the “average” credit card user to earn $1,500 in credit card rewards each year, the “average” credit card user has to spend upwards of $150,000 per year. If you read the paper, you’ll see that they assume a 1% rewards rate. Even if you assume up to a 2% rewards rate (which is rare), we’re talking about $75,000 in spending.

    Ignoring the paper itself, let’s do a back of the envelope. How much higher would prices need to be for merchants to make up their fees? Even if we assume every merchant in the country was paying the maximum 4% fee, and credit cards account for 15% of credit card purchases, prices will have to be 0.6% higher on average to make up the fees. This means that for every $10 a cash payer spends, they’ll have to cough up an extra 6 cents.

    This leads me to believe that the model used in this paper exaggerates the degree of any potential subsidy. While it may exist, it’s probably not a meaningful amount. And I get the impression that no one who has reported on this Boston Fed paper read past the page one abstract, which is unfortunate.