Title: "Credit Cards and Inequality"
Abstract:
Do credit cards inherently exacerbate economic inequality? The existing literature, focused on Net Rewards (the value of rewards net of fees and interest), argues that they do. I challenge this consensus by developing a partial equilibrium model that captures both the payment utility and borrowing functions of credit cards. Results indicate that because low-income cardholders rely on debt to fund consumption, traditional metrics fail to capture the vital welfare value of credit access. By evaluating the distribution of consumer surplus rather than Net Rewards, I demonstrate that the conventional approach overstates inequality, as measured by the Gini coefficient, by 50%. Isolating the respective impacts of the payment and borrowing function confirms that reward programs are the main culprit of inequality, as eliminating these programs reduces the Gini coefficient by 80%. Conversely, eliminating the borrowing function effectively strips lower-income households of the liquidity needed to finance consumption, leading to a 2% increase in inequality. These results directly challenge the belief that interest charges are the key channel driving inequality.