Your credit card points are paid for by people who can't afford credit cards

Every time you tap a rewards credit card, the merchant pays a fee to your bank — typically somewhere around 1.5% to 3% of the purchase. Your bank uses part of that fee to fund your points, miles, or cash back. So far, so familiar.

Here's the part the ads leave out: the merchant doesn't eat that fee. It raises prices to cover it. And since prices are the same whether you pay with a platinum rewards card or with a debit card or with cash, the people who don't earn rewards are paying higher prices to fund the rewards of people who do.

That's not a perk. It's a transfer — from poorer customers to richer ones, processed millions of times a day.

The plumbing is simple, and that's the scandal

When you buy a $100 grocery run with a rewards card, the store might receive only $97.50 or so. The rest goes to the card network and the issuing bank as an interchange fee. Stores operate on thin margins, so they recover the cost the only way they can: across every price on the shelf.

Now think about who pays cash or debit. It's not a random slice of America. Lower-income households are far more likely to pay in cash or with debit — because that's what their finances allow. When the store raises the price of milk by a few cents to cover card fees, the family paying cash pays the increase and gets zero points in return. The affluent cardholder with the premium rewards card pays the same higher price and gets a kickback.

Economists have documented this pattern repeatedly: interchange fees function as a regressive redistribution, flowing from households with less to households with more. You don't need a study citation to see the mechanism. It's right there in the plumbing.

But rewards are "free money"?

Rewards feel free because the cost is invisible. Nobody at the register tells you the shelf price is higher than it would be in a world without swipe fees. The CFPB's biennial credit card market report has started examining the dollar value of credit card rewards precisely because this market has grown so large — rewards are a major profit center and marketing engine for issuers now, not a side perk.

And the "free" framing does real damage. It nudges people to spend more than they would otherwise — studies on the psychology of rewards are consistent that people chase points by buying things they wouldn't buy. It encourages carrying a balance "just this month," where a 20%+ APR wipes out a year's worth of 2% cash back in weeks. The bank knows this. The rewards program is not a gift; it's bait, and the fee income from your interest payments is the catch.

The defense doesn't hold up

Card enthusiasts will tell you rewards "come out of bank profits" or that merchants "choose" to accept cards. Both are half-truths. Yes, merchants choose — because refusing cards loses more sales than the fees cost. That's a hostage situation, not a free market. And yes, issuers compete for customers with richer rewards — which is exactly why the fees stay high. The competition is for cardholders, funded by a fee levied on merchants, passed through to everyone at the register, including the cash customer in the next line over.

The system is beautifully designed — for banks. Interchange income funds rewards, rewards attract high spenders, high spenders generate more interchange. The people outside that loop just pay higher prices and get called financially unsophisticated for it.

So what should you do?

This column isn't telling you to cut up your card. The rational individual move, given the system as it exists, is to earn the rewards while you're being charged for them anyway. Pay cash and you subsidize someone else's points; earn the points and you're merely taking back your own surcharge. Use a no-annual-fee card, pay it off in full every month, and treat the rewards as a partial refund of an invisible tax you were already paying.

But the honest personal-finance take has two layers. Individually: capture your share, never pay interest chasing rewards. Collectively: this is a policy problem. Other countries have capped interchange fees — the Fed's Regulation II already does exactly that for debit cards at large banks — and credit interchange remains the glaring exception. When regulators debate it, the credit card industry warns that rewards will disappear, as if that were a threat instead of an admission.

Your points were never free. They were a rebate on a tax you pay at every register, drawn disproportionately from the people who can least afford it. Enjoy the vacation — but know whose wallet it came from.

The bank sends you a "you earned 2% back" notification. Nobody sends the cash payer a "you paid 2% extra" notification. That asymmetry is the whole business.