Credit card rewards are only good for you if you are good at them.
Credit card rewards can feel super fun. Buying new stuff and spending money is exciting, and if you get presents for doing so, what’s not to like? Credit card companies are well aware of the allure for consumers — rewards are a good way to get people in the door and try to keep them loyal.
What many consumers don’t like to think about are the trade-offs they make when they sign up for rewards cards; after all, your points and miles and cash back aren’t gifts from the sky for being special. Rewards can come at a hidden cost, often to lower-income consumers and people who pay in cash after merchants, who pay higher swipe fees for fancier cards, pass on extra expenses. But rewards cards also come at a cost for people who, to put it plainly, aren’t very good at using them. With all the websites dedicated to the ways to game the credit card system, it’s easy to overlook all the ways that, if you’re not careful, the system is gaming you.
Rewards cards are only really useful for consumers who are generally credit-savvy. Less financially sophisticated consumers — meaning people with higher unpaid balances or who don’t pay off their cards month to month — ultimately end up losing out. They wind up subsidizing the rewards of people who are a little better at credit, wherever they fall on the income spectrum. More than half of credit card customers are “revolvers,” meaning they don’t pay off their full balances each month.
“Financial literacy matters a lot,” said Andrea Presbitero, senior economist in the research department of the International Monetary Fund and one of the authors of a 2022 paper looking at rewards and redistribution in the credit market. “Unsophisticated people, naive people, make a lot of financial mistakes.”
The kicker: To banks, it really doesn’t matter whether a rewards customer is particularly good at managing their personal finances or not. They make money either way. Let’s break down what Presbitero and his colleagues found.
If you can’t pay off your balance, you might be paying for the rewards of someone who can
Rewards cards are a booming business for issuers and popular among consumers across the credit spectrum. According to the Consumer Financial Protection Bureau’s 2021 consumer credit card market report, even people with “deep subprime scores” — meaning very low credit ratings — put over 60 percent of their credit card purchase volumes on rewards cards, and almost three-quarters of near-prime consumers did the same. The highest-credit consumers are the biggest rewards power spenders. (If you need a full explainer on the United States’ credit score system, you can find one here.)
How much bang people are getting for their buck, if any, really shifts across the credit spectrum, according to Presbitero and his colleagues’ research. They found that people with super-prime credit (those who have a FICO score of 780-850, the upper limit) 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, meaning people with credit scores below 660, earn just $1.80 in rewards and pay $6.40 more in interest. “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,” their report reads.
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. 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.
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.
“If you’re an unsophisticated guy, you get this $1,000 more, you increase your consumption and your spending, but you are not able to increase your repayments because you are constrained,” Presbitero said. “You end up with unpaid balances, and on those balances, you’re going to pay interest rates and charges. So, yes, maybe you’ll get like $2 in rewards, but then you have to pay $5 in interest.”
On the second front, the researchers examined people with multiple cards at the same bank and looked at how consumers addressed their different debts. They found that low-credit consumers “tend to follow a sub-optimal (and costly) balance-matching heuristic when repaying their credit cards,” meaning they didn’t pay down their cards in the best ways. 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.
Presbitero said that 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,” he said. “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.”
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.
On an aggregate level, this has a geographic impact. Presbitero and his colleagues note that, on net, average rewards are higher in zip codes with higher education levels, higher average income, and a lower share of Black residents.
The bank wins regardless
Thinking about where credit card rewards come from can be uncomfortable. Yes, they are nice when you get them, but they’re not inevitable or really necessary. It’s a little awkward that consumers are offered a prize for the act of engaging in capitalism, and one where there are fairly significant trade-offs, on net, among consumers, merchants, and other stakeholders.
The important thing to keep in mind here is that credit card companies and banks are in the business of making money, and they would not be handing out rewards cards if there were not something in it for them. In this case, there are billions of dollars on the line.
Issuers make money on rewards cards holders regardless, across the credit spectrum. The researchers found that banks profit most from near-prime and prime consumers in the middle of the FICO score distribution. At the high end and the low end of the FICO range, the ways banks make money differ. For subprime consumers, over 60 percent of banks’ revenue on rewards cards comes from interest income. For super-prime consumers, more than 80 percent is from interchange income, meaning the swipe fees merchants pay when people spend. In the middle, banks can make money on both interest charges and swipe fees.
“The bank is clearly the winning player here,” Presbitero said. “Regardless of my behavior, if I’m a revolver or not, if I spend less or a lot, the bank always makes money.”
Millions spent on lobbyists, a billion spent on safeguards. Will it be enough to stay in the United States?
The act of scrolling through your For You feed on TikTok might come with an additional sense of impending doom these days. After years of hand-wringing over the enormously popular app’s ties to China and the potential national security threat they present, it looks like someone is going to do something about it.
TikTok is grappling with an increasingly real prospect of being banned in the United States. This wouldn’t just be a mostly performative prohibition of installing the app on federal or state government-owned devices. It could also be more impactful than the legally questionable ban that former President Donald Trump tried and failed to enact in 2020. The ban TikTok is now facing would forbid its China-based parent company, ByteDance, from doing business in the United States, which would block Apple and Google from hosting the TikTok app in their app stores. It wouldn’t make it illegal for you, the consumer, to use TikTok. It would just make it much harder to do so.
Banning an app is more the provenance of countries like, well, China, which has banned a number of American apps and websites, including Facebook, Instagram, YouTube, and Twitter. It’s also not certain that the US government actually would take such a huge step. But you’ve surely heard that it could happen, and you’re probably wondering if and how it would — or even why it’s necessary.
Seemingly every Big Tech company is facing unprecedented levels of scrutiny these days, but TikTok faces opposition that its peers don’t. At a time when US-Chinese relations aren’t great, TikTok’s popularity is a threat to America’s technological superiority, especially when it comes to the internet. But US lawmakers are much more likely to point to the perceived threat to national security, believing that the Chinese government is using the app to spy on Americans and push harmful content onto them through the app’s powerful yet mysterious For You recommendation algorithm.
To deal with these conflicts, ByteDance has spent over three years negotiating with the Committee on Foreign Investment in the United States, or CFIUS, an inter-agency group that reviews transactions involving foreign parties for national security threats. ByteDance hopes to reach an agreement that would allow TikTok to continue to do business here while minimizing the chances of interference from the Chinese government. While ByteDance says there is a draft agreement with CFIUS, it still hasn’t been finalized. It didn’t help matters when, in the last days of 2022, ByteDance had to admit that some of its employees improperly accessed US citizens’ TikTok data as part of an investigation into leaks to journalists.
ByteDance is spending a lot of money trying to convince detractors that it doesn’t take marching orders from China and that it wouldn’t give the Chinese government US user data or influence US users. The company has spent millions building up and expanding its Washington, DC, presence, and more than $1 billion on “Project Texas,” an effort to rebuild the app on US servers in order to wall it off from ByteDance and China as much as possible, while also promising several layers of independent oversight and transparency.
“We are confident that the proposal under consideration by CFIUS will fully satisfy US national security concerns,” TikTok spokesperson Brooke Oberwetter told Recode.
It looks like 2023 will finally be the year when we find out if ByteDance can convince an increasingly hostile audience that TikTok isn’t a national security threat — or what happens to TikTok if it can’t.
TikTok’s spending big on lobbyists and Project Texas
The only thing that may have grown faster than TikTok’s popularity in the US is the company’s DC presence. ByteDance spent just $270,000 on federal lobbyists in 2019, a year when TikTok agreed to a settlement with the FTC over children’s privacy law violations for a then-record fine of $5.7 million and when lawmakers started to raise concerns over its ties to China. In August of that year, Trump issued his executive order proclaiming TikTok to be a national security threat and, using the International Emergency Economic Powers Act, ordering it to be sold to an American company or banned within 45 days. This obviously didn’t happen: President Joe Biden eventually rescinded the order, which was controversial to say the least, leaving it to CFIUS to make a deal with ByteDance.
TikTok has doubled down on its lobbying efforts in the meantime. The company spent $2.61 million on federal lobbyists in 2020, hiring people with connections to Republican and Democratic lawmakers alike (some were former lawmakers themselves). That spending nearly doubled to $5.18 million in 2021, and it reached $4.28 million in the first three quarters of 2022. In late 2021, TikTok signed a lease for its first DC office. In April 2022, it grabbed an additional floor. That October, it hired Jamal Brown, who was the press secretary for Biden’s presidential campaign and then the deputy press secretary for the Pentagon, as a policy communications director.
“This is kind of the template for how modern tech lobbying goes,” said Dan Auble, senior researcher at Open Secrets, which tracks lobbyist spending. “These companies come on the scene and suddenly start spending substantial amounts of money. And ByteDance has certainly done that.”
While ByteDance has spent a lot on federal lobbying, some of its peers — Meta and Amazon, for instance — still spend a lot more. Meta, for instance, spent over $20 million on lobbying in 2021, and Amazon spent over $19 million. Far more of ByteDance’s money has gone into Project Texas. In its effort to convince regulators that its app is walled off from China and ByteDance, TikTok partnered with Texas-based company Oracle, which is hosting US user data on and running traffic through its cloud infrastructure as well as reviewing the source code for TikTok’s recommendation algorithm and content moderation tools. Access to data and other parts of TikTok will be strictly limited to only essential personnel, and both Oracle and the US government will have some oversight.
TikTok’s Oberwetter said this solution is “under consideration” by CFIUS and that the company believes it’s a “comprehensive package of measures with layers of government and independent oversight to address concerns about TikTok content recommendation and access to US user data, and to ensure that the TikTok software is operating as intended and is free of backdoors that could be used to manipulate the platform.”
On paper, these measures seem like they’d do enough to satisfy CFIUS, which was reportedly very close to finalizing the agreement several months ago. Samm Sacks, a senior fellow at Yale Law School’s Paul Tsai China Center, said the deal seemed to be structured around not trusting China or even ByteDance at all, and building a “set of robust protections” around that.
“For all of the complaints about the [national security] threat, there is a solution that would address it, and you don’t have to take TikTok’s word for it,” Sacks said. “[Project Texas] turns the keys over to somebody else.”
It’s not clear when or even if CFIUS will officially sign off on the plan. In lieu of an agreement, TikTok has delayed its plan to hire consultants who are supposed to monitor its operations and report back to the US government. That’s not a great sign that a deal is imminent, even as TikTok insists that it would satisfy all of CFIUS’s concerns.
TikTok’s detractors aren’t buying it
What’s holding up the federal government? Politics, mostly. For some lawmakers and security officials, there may be nothing ByteDance and TikTok can do to convince them that the app isn’t an arm of the Chinese Communist Party. The lack of trust is understandable. For years, TikTok has been dogged by reports that it isn’t as independent of ByteDance or China as it wants the public to believe. Then, the late December revelation that ByteDance employees accessed TikTok user data to track US-based journalists couldn’t have come at a worse time. It was just the sort of incident lawmakers and agency officials suspicious of ByteDance and TikTok needed to make their case that the app couldn’t be trusted under any circumstance.
TikTok says the matter was an “egregious misuse” of user data by a few employees who violated company policy and are no longer employed there. It claims that the security controls Project Texas is implementing would have prevented this from happening in the first place, since ByteDance employees would not have been able to access that data.
It’s worth pointing out that ByteDance isn’t the first tech company to spy on journalists. As Forbes noted in its piece revealing what ByteDance had done, Uber and Facebook have been accused of similar actions over the years, and Microsoft searched a French blogger’s Hotmail account in 2012 to find out which Microsoft employee was sending him trade secrets. None of those services faced a potential nationwide ban over it, but none of them were owned by a Chinese company, either.
That leaves us with a few ways this could all play out. The most likely is that the CFIUS deal finally goes through. Biden could always pull a Trump and suddenly put out an executive order banning the app, but that’s not likely. It didn’t work when Trump tried it, and Biden isn’t as outwardly hostile to TikTok as his predecessor was. He’s invited TikTok creators to the White House several times, and a nonprofit associated with the Biden administration even has an official TikTok account, which was posting videos touting Biden’s accomplishments as recently as last November.
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Joe Raedle/Getty Images
Not everyone’s counting on CFIUS. Sen. Mark Warner (D-VA), chair of the Senate Intelligence Committee, has expressed plenty of reservations about TikTok, and says he’s losing patience with CFIUS. If a deal can’t be reached, “Congress could soon be forced to step in,” he told Recode. Rather than a ban on just one app or company, however, Warner would like to see legislation that sets standards or rules for any app that falls under a set of criteria, including being owned by a company based in a country of concern. That would include TikTok, but it wouldn’t be limited to it, Warner’s office said.
For some lawmakers, nothing short of a TikTok ban or forcing ByteDance to sell TikTok to an American company will do. Sen. Marco Rubio (R-FL) has been consistent about that for years, and now he’s joined by Rep. Raja Krishnamoorthi (D-IL) and Rep. Mike Gallagher (R-WI), chair of the House’s new select committee on China. Gallagher’s office told Recode that he would support a sale to an American company as long as it included control over TikTok’s algorithm. Gallagher hopes to work across the aisle and with the Biden administration on this, and will be trying to set up a meeting with TikTok “in the coming weeks.” But the Congress member is not budging on his insistence that TikTok can’t operate here while it’s owned by a Chinese company.
“ByteDance must completely divest and there must be an end to Chinese ownership and control of the app,” Gallagher’s office said.
TikTok’s Oberwetter pointed out that banning one app won’t solve broader issues, such as data privacy, security, and harmful content. Legislation that regulates an industry rather than one company within it could kill two birds with one stone. Many bills have been introduced over the years that could do this. None of them have passed.
What a TikTok ban actually means
There are already “TikTok bans” in the US, but they’re very limited and chances are they don’t apply to you unless you’re a government worker or a massive fan of South Dakota’s tourism TikTok account, which was deleted as part of that state’s ban. The ban in the omnibus bill that passed at the end of 2022 and the bans that about half of all states have enacted so far only apply to government-issued devices.
If it came down to truly banning the app for the rest of the country, the most likely path would be to classify TikTok as a national security threat. The government has done this to other Chinese companies, like telecommunications equipment manufacturer Huawei. But banning the sales and use of hardware is more straightforward than an app, which is distributed over a global internet that’s notoriously impossible to regulate or control. And there’s no guarantee it would survive a court challenge.
“Courts do not view this type of legislation kindly, or did not when Trump proposed a similar ban. But that was three years ago and antagonism toward China has only increased in the intervening years,” said Sarah Kreps, director of Cornell University’s Tech Policy Institute.
And again, even if the federal government did ban Apple and Google from hosting TikTok in their app stores, there would probably still be ways to access the platform on the web or in alternate app stores (on Android devices, at least). It would be a lot harder, though, and that could discourage most users from trying.
TikTok has a few things going for it, too. With more than 100 million users in the US, there would surely be outrage if the government banned the app they love and spend hours on every day. TikTok’s user base might skew young, but a lot of them are old enough to vote. And they’re all able to write angry letters to or protest outside the offices of lawmakers who ban the fun video-sharing app they love. Not to mention the businesses that are increasingly relying on TikTok for their digital ad campaigns and might not be thrilled to see it taken away. Lawmakers and FBI directors might not have much use for TikTok, but millions of others do.
For all the money TikTok’s spending to make its case to DC, its most effective advocates might be the people it doesn’t pay at all.
The Florida governor (and likely presidential candidate) appears to believe that government exists to advance his ideas — and to suppress dissent.
Florida Gov. Ron DeSantis isn’t exactly hiding what he’s up to.
Earlier this month, the Republican appointed Chris Rufo, the architect of the 2021 moral panic over “critical race theory,” to the board of a public liberal arts school in Florida. As Rufo told New York Times columnist Michelle Goldberg, his goal — and the goal of several other DeSantis appointees to the New College of Florida’s board — is to transform New College, a liberal bastion in the South, into something more like Hillsdale College, a conservative school in Michigan with close ties to former President Donald Trump.
The one positive thing that can be said about this appointment is that it is, at least, legal — something that cannot be said about many of the governor’s attempts to sic the government on institutions he deems too liberal. DeSantis isn’t just determined to use his public office to suppress dissenting voices and promote his own reactionary views; he’s also quite willing to thumb his nose at the Constitution in order to do so.
Indeed, DeSantis often seems to revel in his contempt for the First Amendment, even fundraising off of it. Shortly before DeSantis signed unconstitutional legislation punishing the Walt Disney Company for criticizing one of his policies, the governor sent a fundraising email to supporters touting the fact that he was doing so. The company, DeSantis said, was being punished after it “tried to attack me to advance their woke agenda.”
DeSantis signed legislation imposing speech codes on university professors, as well as legislation attempting to seize control of content moderation at sites such as YouTube, Twitter, and Facebook. He attacks classroom teachers with vague, unconstitutional laws stigmatizing LGBTQ people. His administration threatens drag performers with criminal charges.
In his victory speech shortly after winning reelection in his increasingly conservative state, DeSantis pledged to “fight the woke in the legislature,” “fight the woke in the schools,” and to “fight the woke in the corporations.”
One of his lawyers later clarified that the word “woke” means “the belief there are systemic injustices in American society and the need to address them.”
As a constitutional matter, a governor is allowed to give speeches arguing that the United States is somehow miraculously immune from systemic injustice. He may sign legislation repealing programs intended to cure these injustices. He may appoint officials to public school boards that share his belief that the US is immune to these injustices. And he may even enact policies that help perpetuate these injustices, assuming that those policies violate neither the state nor federal constitution.
But DeSantis goes much further. He wields the government’s sovereign powers to sanction speech he does not like, and to punish institutions that criticize him. DeSantis, in other words, does not seem content to simply enact policies that hew to a right-wing economic or social vision. He wishes to use the sovereign powers of government to shape public discourse itself — punishing some ideas, rewarding others, and conscripting public schools and universities into his culture war.
To be fair, DeSantis is hardly unique among Republican state governors in this regard — Texas Gov. Greg Abbott (R), for example, signed legislation targeting social media companies that is even more aggressive than Florida’s. But DeSantis is also widely viewed as a leading contender for the GOP presidential nomination in 2024, so he is uniquely positioned to take his speech war national if elected president.
Much, though admittedly not all, of DeSantis’s agenda clearly violates the First Amendment. The government may not punish its critics for their speech. It may not, as a federal appeals court explained in a decision blocking a Florida social media law, seize control of content moderation at Twitter, Facebook, or YouTube. And, while Florida does have some control over what state-employed teachers and professors say in their classrooms, the government cannot terrorize those instructors with vague laws that do not communicate what sort of classroom instruction is permitted and what is forbidden.
But even if the courts enforce the First Amendment with vigor — a prospect that will grow increasingly uncertain if DeSantis starts appointing federal judges or justices — at least some of DeSantis’s action are lawful, even if they are ill-advised. Nothing in the Constitution, for example, prevents DeSantis from doling out government jobs to bad-faith actors like Rufo.
The Constitution, in other words, provides some safeguards against elected officials who wish to target dissent, but it is not a perfect shield. And it is a worthless shield if the judiciary is controlled by partisans and ideologues who will not enforce the First Amendment against men like DeSantis.
DeSantis v. the First Amendment
Broadly speaking, DeSantis’s efforts to limit free speech and shape public discourse fit into three boxes. The first, which includes things like Florida’s laws attacking Disney and attempting to gain control over social media sites, seek to control what major companies can say and what speech they must broadcast. These laws are clearly unconstitutional.
The second box includes laws, like Florida’s “Don’t Say Gay” law and the so-called Stop WOKE Act, which impose speech restrictions on public school teachers and professors. The constitutional status of these sorts of laws is more nuanced. While the Supreme Court has repeatedly said that the First Amendment provides some protections for academic freedom, it hasn’t fully fleshed out those statements. As a general rule, moreover, states do have the power to write their own school curriculums and to require instructors to follow those curriculums.
That said, the Supreme Court has said that laws governing classroom instruction may not be so vague that people “of common intelligence must necessarily guess at its meaning and differ as to its application.” Neither the Don’t Say Gay law nor the Stop WOKE Act complies with this rule.
Then there’s a third box, which consists of actions that use governmental institutions to promote a conservative viewpoint, but without suppressing speech. Florida acted within its lawful authority, for example, when it appointed former Sen. Ben Sasse, a conservative Republican, to lead the University of Florida. And Sasse will have broad authority to use his new office to promote Republican ideas on campus.
DeSantis cannot tell private companies what they are allowed to say and what they are allowed to publish
Let’s start with what should be the most basic point imaginable under the First Amendment: The government may not use its sovereign powers to punish people who criticize elected officials or their policies. As the Supreme Court said in Hartman v. Moore (2006), “official reprisal for protected speech ‘offends the Constitution [because] it threatens to inhibit exercise of the protected right.’”
To be sure, DeSantis’s most high-profile attempt to punish a perceived enemy involves a company that is quite powerful in its own right. It’s not like the Walt Disney Company lacks the resources to defend itself against unconstitutional legislation passed by a state government.
But the fact that DeSantis targeted one of the largest and most popular producers of First Amendment-protected art in the world is also a warning about how far his agenda could reach if it is successful. A single individual who is sanctioned by the government is likely to silence their own speech, but a major media company that is targeted for reprisals could change the message that it broadcasts to millions of voters.
And these sorts of reprisals are unlawful no matter what form they take. If the government, for example, offers a special tax break to a major employer, it cannot strip away that tax break to punish the employer for its First Amendment-protected speech — even though there is obviously no constitutional right to pay less taxes than other companies.
Which brings us to the specific circumstances of DeSantis’s attack on Disney. After Disney denounced the Don’t Say Gay law, which allows parents to sue their local school district if topics such as sexual orientation or gender identity are mentioned in the classroom, Florida retaliated by passing a law that will dissolve the “Reedy Creek Improvement District,” a 40-square-mile area that includes Walt Disney World, where Disney has an unusual amount of control over local land use and taxation. (The legislature is likely to modify this law before it takes effect in June.)
There’s compelling evidence that Florida did this to punish Disney for speaking out against DeSantis’s policies. Shortly before signing the law, DeSantis bragged that “Disney and other woke corporations won’t get away with peddling their unchecked pressure campaigns any longer,” and he suggested that Disney is a “corporate lapdog” for “the Democrat machine.” DeSantis’s lieutenant governor even said that the goal is to pressure Disney into changing the content of its First Amendment-protected speech.
Newsmax host Eric Bolling: “Is there an opportunity for Disney to change their mind and say we will disregard this whole ‘woke’ agenda…and would the governor then say, ‘fine, you can keep your status but we’re gonna keep an eye on you now’?”
— Justin Baragona (@justinbaragona) April 21, 2022
Florida Lt. Gov: “Sure!” pic.twitter.com/5E8UKGDVjF