Study Shows LMI Households Rely on Credit Card Rewards 

LMI cardholders use cashback rewards to supplement daily expenses, combat rising inflation

WASHINGTON, DC – The Electronic Payments Coalition is highlighting findings from a report examining how American consumers, including lower-income consumers, use reward credit cards. This report highlights how proposals restricting card issuers’ ability to offer them would adversely affect cardholders of all income levels. The study found that the share of credit cards offering rewards is nearly identical across income levels and that cardholders earn rewards at virtually equal rates.

The main difference in rewards usage across income levels was in how rewards were redeemed. While all accountholders prefer “cashback” rewards, low- to moderate-income (LMI) accounts show a stronger preference for cash, with spikes in November and December, as well as during late summer and the back-to-school shopping season. Expressed as a share of income, the boost represented through rewards is three to four times larger for LMI cardholders than for the highest income cardholders. For context, rewards earned by LMI cardholders amount to a 17-cent per gallon annual discount at the gas pump – a tangible savings for these households. 

The key findings from the report include:

• Rewards are for everyone. Since 2020, rewards card ownership has grown the fastest among the low-to-moderate (LMI) income segment. Currently, more than two-thirds of LMI cardholders own a rewards card. This result illustrates that rewards cards are popular amongst low-income households, and that reward programs do not exclusively serve upper-income customers.

• Rewards supplement consumer income. All cardholders receive a boost to income from their rewards. Many cardholders save up rewards over the course of months to supplement holiday and back-to-school shopping. In fact, total rewards savings in 2023 accounted for 23%-32% of planned holiday purchasing. Consumers also use their rewards to supplement everyday expenses, with some studies suggesting consumers now rely on their rewards cards more than ever in the face of rising inflation.

• There is no cross-subsidy or so-called “Reverse Robin Hood.” Rewards redemption rates are similar across income groups, suggesting that each income group is taking advantage of its rewards at the same level. Moreover, rewards earned and redeemed are nearly identical across income segments after controlling for spending, directly countering the RRH argument that low-income segments subsidize rewards for wealthier consumers.

• Rewards are especially important to lower-income consumers. Low-income consumers deeply value credit card rewards. LMI accounts are most likely to redeem rewards for cash, implying that this income segment uses rewards for everyday spending needs. Rewards have a significantly larger financial impact on LMI cardholders than on higher-income cardholders. Removing or reducing reward programs would negatively impact low-income households’ finances more than any other income group.

The study also found that rewards earned from using credit cards can help offset price increases, but cash and debit card users do not benefit from rewards and thus lose out on potential savings generated through cashback rewards. Some have argued merchants simply pass through the cost of card acceptance to all consumers, but the report cites the benefits of credit card acceptance, which can lead to an uptick in purchases that ultimately results in a 5-6.4% net benefit to merchants, even after factoring in acceptance costs.

While the increased profitability generated by accepting credit cards means that there is little business rationale to raise prices, for retailers who nonetheless choose to impose surcharges on credit card users to recoup card acceptance costs, the so-called Reverse Robin Hood effort still fails to hold up because the cardholder alone bears the additional cost. Moreover, as the experience of the Durbin amendment demonstrates and myriad research studies have proven, large retailers have failed to pass through savings from debit card interchange reductions to their customers by lowering prices. 

Finally, reward cardholders often carry a balance of unredeemed rewards. This represents an important safety net for these cardholders.

The EPC study was conducted during the first quarter of 2024 among EPC members and represents more than half of the credit card market as measured by purchase volume. The study excluded cobranded, small business, and international rewards cards. Income segments were approximated using the Community Reinvestment Act income bands.