Investing

The home improvement projects homeowners are most interested in, such as sparkling new kitchens and baths, rarely deliver the return on investment they expect.
The top projects with the greatest returns in resale value are more often related to a home’s curb appeal.
Financing renovations or improvements will only get more expensive as long as the Federal Reserve keeps interest rates high to curb inflation.

Most homeowners are planning to remodel at some point down the road, but not everyone will get their money’s worth in improved home value.
Of all home improvement projects, the most popular are sparkling bathroom overhauls, according to newly released data from the Contractor Growth Network, followed by big-ticket kitchen and basement renovations.

In some cases, homeowners may get that money back when it’s time to sell, but more often, these home renovations rarely deliver a great return.
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Overall, homeowners are getting just a 60% return on their renovation investments, according to a separate Cost vs. Value report from Zonda Media, a housing market research and analytics firm.
The projects offering the greatest returns in resale value are not new kitchens and baths, but rather projects related to a home’s curb appeal.
“You have to throw away everything you see on HGTV,” Todd Tomalak, Zonda’s principal of building products research, recently told CNBC. 

Homeowners can expect a 100% return on investment on only a handful of renovations or additions, such as converting a heating, ventilation and air-conditioning system to electric; replacing garage doors; installing a stone veneer; or upgrading to a steel front door.
A minor kitchen remodeling — such as painting and updating the backsplash — did provide high returns, but major kitchen and bathroom renovations did not, the Zonda survey found.
With high home prices and a tight supply of units for sale, more people are choosing to fix up their current home rather than look for something new, according to Tomalak.

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Even though both construction and financing costs are up, this decade could be “the golden age of remodeling,” Tomalak said.
Still, cost is a “critical issue,” he added.
Further, financing renovations or improvements will only get more expensive as long as the Federal Reserve keeps interest rates high to curb inflation.

Do the math before starting a home project

About 95% of homeowners said they plan to take on a major home improvement project in the next five years, according to a recent report by Real Estate Witch. However, only 50% said they can afford it at the moment.
They’ll also likely spend more than they initially expect. The average homeowner shelled out $3,890 on renovations and remodeling in the past year alone, the report found.
To budget wisely, talk to a realtor in your area about specific renovations that could increase the value of your home and which ones to skip, advised Sophia Bera Daigle, CEO and founder of Gen Y Planning, an Austin, Texas-based financial planning firm for millennials.

Always get competitive bids on any project and add 10% to that estimate as a “buffer,” she said, since extra expenses “will likely come up.”
If you are going to finance a project, look into obtaining a home equity loan or home equity line of credit and factor in the interest rate and potential monthly payment. “Make sure you can work these monthly payments into your budget before you begin,” Daigle said.
It may make more sense to hold off on a big renovation so you can save money, pay down debt and see if interest rates go down, added Daigle, a certified financial planner and also a member of CNBC’s Advisor Council.
Finally, consider how long you will stay in your current home and how a renovation will affect your life, Tomalak said. “If people are moving less often, this shifts the question of remodeling from an investment to the quality of living.” More

A tentative deal to raise the debt ceiling limit includes up to $21.4 billion of IRS budget cuts, slashing part of the nearly $80 billion in agency funding.
The bipartisan bill rescinds nearly $1.4 billion of the money allocated to the IRS and a separate deal would repurpose $20 billion for fiscal years 2024 and 2025.
White House officials on Sunday said they don’t expect the budget cuts to fundamentally change the agency’s near-term plans.

Visitors at the U.S. Capitol in Washington, D.C., on May 24, 2023.
Jonathan Ernst | Reuters

A tentative deal to raise the debt ceiling limit includes up to $21.4 billion of IRS budget cuts, slashing part of the nearly $80 billion in agency funding enacted last August to boost taxpayer service, technology and enforcement.  
The bipartisan bill, released by House Speaker Kevin McCarthy and President Joe Biden on Sunday, rescinds nearly $1.4 billion of the money allocated to the IRS. If unchanged, a separate deal would also repurpose $20 billion of IRS funding for fiscal years 2024 and 2025, according to the White House.

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Since the original $80 billion in IRS funding was for a 10-year period, White House officials on Sunday said they don’t expect the budget cuts to fundamentally change the agency’s near-term plans. But the IRS may need to request more funding during the latter years of the original timeline, they said.
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If finalized, the IRS budget cuts would mean the additional agency funding runs out faster, according to Alex Muresianu, a policy analyst at the Tax Foundation.
“But the IRS still has a very large funding increase relative to the baseline,” he said. “So it’s not like we’re turning back the clock.”
The $80 billion IRS funding has been a hot-button political issue since its enactment, and repealing the money was a theme throughout the 2022 midterm elections in the fall.

The IRS still has a very large funding increase relative to the baseline, so it’s not like we’re turning back the clock.

Alex Muresianu
Policy analyst at the Tax Foundation

House Republicans in January voted to slash IRS funding, following a pledge from Speaker Kevin McCarthy to rescind the money approved by Congress. But the measure halted without support from the Democratic-controlled Senate or the White House.
The IRS released its plan for the $80 billion funding in April, aiming to bolster taxpayer service, improve outdated technology and reduce the budget deficit by closing the tax gap with a focus on wealthy families and corporations.
White House officials on Sunday reiterated Biden’s commitment to cracking down on tax evasion among top earners.

Meanwhile, the debt ceiling bill faced pushback Tuesday from Republican members of the House Rules Committee. The bill must pass the GOP-controlled House and Democrat-majority Senate before June 5, which is the soonest the U.S. could run out of money, according to revised estimates from the U.S. Department of the Treasury.
The House is tentatively scheduled to vote on the bill on Wednesday night. More

If nothing in the debt ceiling deal changes, the pause on federal student loan payments will “cease to be effective” within months.
However, the Biden administration was able to keep its sweeping loan forgiveness plan off the chopping block in the negotiations.

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Federal student loan borrowers hoping for another extension of the pandemic-era payment pause received bad news in the tentative deal between Republican lawmakers and President Joe Biden to suspend the debt ceiling and avoid default.
According to the legislative text of the agreement, the pause on federal student loan payments, which has been in effect for more than three years now and spanned two presidencies, will “cease to be effective.” Borrowers will be required to resume paying their student loan bills 60 days after June 30. Their due date will likely be in September, experts said.

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Consumer advocates criticized the deal.
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“The deal codifies an assurance for Republicans that Biden will head into 2024 as Americans’ debt collector in chief,” said Astra Taylor, co-founder of the Debt Collective, a union for debtors.
White House spokesman Abdullah Hasan defended the president’s negotiations on behalf of borrowers.
“President Biden protected the student debt relief plan in its entirety,” Hasan said, adding that the administration “announced back in November that the current student loan payment pause would end this summer — this agreement makes no changes to that plan.”

Here’s what borrowers need to know about the debt ceiling legislation.

Deal ends the payment pause, likely for good

The pause on federal student loan payments is one of the few remaining Covid-related relief measures still in effect. It was first announced by then President Donald Trump in March 2020, and has since been extended eight times.
The policy has suspended the accrual of interest on federal student debt and allowed borrowers to forgo making their payments without facing any penalties. Tens of millions of Americans are taking advantage of it. Since the start of the public health crisis, those who have benefited from the pause have saved around $5,000 in interest on average, according to calculations by higher education expert Mark Kantrowitz.
In the current version of the debt ceiling agreement, the pause would be terminated 60 days after the end of June. The U.S. Department of Education would also be restricted in its ability to extend this particular relief again, with another prolongment likely only possible from Congress.

The White House was aiming to restart student loan payments within months anyway, Kantrowitz said, and so “the legislation does not represent a change in that regard.”
Indeed, the Biden administration had been bracing borrowers to be ready for the bills to resume 60 days after the legal troubles over its student loan forgiveness plan were resolved, or by the end of August, at the latest.
However, the fact that only Congress may be able to extend the current pause worried advocates, given that the president’s sweeping student loan forgiveness plan is currently on hold while the Supreme Court decides its fate.

The deal codifies an assurance for Republicans that Biden will head into 2024 as Americans’ debt collector in chief.

Astra Taylor
co-founder of the Debt Collective

“This deal takes away the White House’s ability to extend the current payment pause if the Supreme Court kills the relief, making it more likely 40 million people will have to repay loans that the president promised were canceled,” Taylor said.
The Biden administration has warned that resuming student loan payments without being able to carry out its debt forgiveness plan could trigger a historic spike in defaults and delinquencies.

Student loan forgiveness, other relief, not in agreement

The agreement to avert economic default doesn’t include a cut to Biden’s plan to cancel up to $20,000 in student debt for tens of millions of Americans. House Republicans wanted to halt the program.
The Supreme Court is likely to strike down the policy, given that the conservative justices outnumber the liberals. A decision by the highest court is expected in June or July.
The Biden administration’s “pending regulatory changes” to student loan repayment would also not be impacted by the deal, including implementing a new repayment plan, said Kantrowitz.
Under the plan, qualifying borrowers would pay just 5% of their discretionary income toward their student debt each month. More

FA Playbook

As high inflation continues, the financial strain on many households has worsened.
For those feeling financial stress, there are several ways to find some wiggle room, experts said.

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Americans have suffered in “declines in overall financial well-being,” according to a new annual Federal Reserve report on economic well-being of U.S. households released last week.
Only 63% of all adults can cover an unexpected $400 expense, the report on 2022 found, down from a high of about 68% in 2021. The results are in keeping with other recent surveys that likewise show the cash cushion Americans have set aside for emergencies has dwindled in the face of record high inflation.

To slow the price growth, the Federal Reserve has steadily raised interest rates, which has posed another problem for households: higher interest rates on debt.
U.S. credit card debts now total nearly $1 trillion — or $986 billion, to be precise — as of the first quarter of 2023, according to the Federal Reserve Bank of New York. That marks the first time in 20 years balances have not fallen following the holiday season, according to the central bank’s research.

In February, Bruce McClary, senior vice president of the National Foundation for Credit Counseling, told CNBC an “ugly stew is brewing” as individuals and families juggle the pressures of rising prices, lower savings and higher costs on their debts.
Now, experts say they’ve seen those pressures continue.
“It’s obviously a time for many people of rising stress levels with respect to their personal finances,” said Mark Hamrick, senior economic analyst at Bankrate.

The situation will continue for as long as economic growth is subpar and inflation is elevated, Hamrick predicted.
Nevertheless, there are several ways consumers can try to ease their financial stress, experts say.

1. ‘Don’t wait until the debt collector calls you’

The National Foundation for Credit Counseling is seeing two trends: an increasing number of people reaching out to nonprofit credit counselors for help, and elevated demand for the debt management programs offered by these nonprofits, according to McClary.
“We’ve seen over the past year that there’s less and less wiggle room in people’s budgets,” McClary said.
Some people are seeking help after they’ve already fallen behind and have started to get debt collection calls, he said.
“My advice to people is: Don’t wait until the debt collector calls you,” McClary said.
“If you’re at the point where you’re going to miss a payment, reach out and get help,” he said, from your lenders, a credit counselor or another trusted financial professional.
If a person waits until after they have missed a payment, they may have fewer options, he said.

2. ‘Think seriously about delaying discretionary purchases’

As prices and interest rates have gone up, it’s a good time to think about putting off unnecessary purchases, according to Hamrick.
“Think seriously about delaying discretionary purchases or at least keep them on or under budget,” Hamrick said.
In the years Bankrate has been doing surveys on top financial regrets, respondents never regret not spending more money, Hamrick noted. But the regret that often ranks highly is not saving more for long-term goals such as emergency savings or retirement, he said.
Delaying big-ticket purchases, such as replacing a car, may free up more of a household’s budget to cover other expenses or possibly to set cash aside.

3. Schedule time to manage household finances

In the same way individuals and families spend time planning their daily, weekly or monthly activities, they should also be setting aside time to keep tabs on their finances, Hamrick said.
This may be as simple as going through bank account transactions to make sure they’re on budget. It may also include keeping tabs on subscriptions and other monthly charges to see where it might be possible to trim costs, he said.
People may be surprised at how much money per month they’re able to save by canceling services, renegotiating rates or finding another provider, he said.
If there is extra cash to set aside, high interest rates have made it a great time to get a better return on those funds, he said.
“High-yield savings is a remarkable opportunity right now,” Hamrick said. More

Total investments in 529 college savings plans took a hit in 2022, sinking 15% from a year earlier.
But these portfolios are designed to weather some ups and downs.
Alternatively, there are also relatively risk-free investment options for 529 plans that may provide more peace of mind in an uncertain market, one expert said.

These days, many people are worried about paying for college. Less than half of Americans are confident that they’re currently saving enough for future education expenses, according to a recent report by Edward Jones.
Checking your 529 college savings balance may not provide much comfort, either.

Last year, these popular savings plans took a hit during a prolonged period of market volatility. The average account balance was $25,630 at the end of 2022, down from a high of more than $30,000 in 2021, according to the College Savings Plans Network, or CSPN, a network of state-administered college savings programs.
Total investments in 529s also fell, to $411 billion in 2022, down nearly 15% from $480 billion the year before.
More from Personal Finance:Parents paying for college ‘is the norm’4 strategies to avoid taking on too much student debtThese moves can help you save big on college costs

Advantages of a 529 plan

Overall, there are many advantages to a 529 plan. In some states, you can get a tax deduction or credit for contributions. Earnings grow on a tax-advantaged basis and, when you withdraw the money, it is tax-free if the funds are used for qualified education expenses such as tuition, fees, books, and room and board, or even apprenticeship programs.
A few states also offer additional benefits, such as scholarships or matching grants, to their residents if they invest in their home state’s 529 plan.

Further, you can now put some of the funds toward your student loan tab: up to $10,000 for each plan beneficiary, as well as another $10,000 for each of the beneficiary’s siblings.
And starting in 2024, savers can roll money from 529 plans over to Roth individual retirement accounts free of income tax or tax penalties.

How to account for risk

On the downside, these plans are susceptible to losses, just like any other investment account.
Generally, 529 plans offer age-based portfolios, which start off with more equity exposure early on in a child’s life and then automatically adjust so as the start of college draws near, the portfolio will be weighted toward more conservative investments, such as bonds.
“An enrollment-based strategy is designed for market volatility,” said Chris Lynch, president of TIAA Tuition Financing. 
For example, during a downturn, a beneficiary in third grade with a portfolio heavily weighted toward equities could see a more pronounced reduction, he said, compared with a beneficiary in high school, whose portfolio would be more muted due to a higher allocation in cash and bonds.
Still, the time horizon for college is much shorter compared with most retirement savings accounts, he added. “We’d love it if people started when their children were newborns, but most people don’t — that could drive a little more urgency around a market drop.”

Plan holders have two opportunities a year to change their asset allocation if, for example, they feel that an overly aggressive portfolio is too nerve-wracking in the current climate, according to Rachel Biar, chair of CSPN and assistant state treasurer of Nebraska. “All plans have options,” she said.
“Thinking long-term about your money is critical but right now, investing can feel risky,” added Mary Morris, CEO of Virginia529, one of the largest 529 plans in the country.
“Fortunately, there are safe investment options for 529 plans that can handle market turbulence and provide peace of mind.” 
Here are Morris’ recommendations for some ways to preserve capital in a volatile year:

FDIC-insured accounts. An FDIC-insured portfolio element may appeal to risk-averse investors or those with a shorter time before the funds are needed for higher education or other qualified education expenses. These interest-bearing deposit accounts are insured by the FDIC up to $250,000 for each account owner, similar to other checking and savings accounts.
Stable value funds. Stable value funds are a good investment option for those looking to balance with low-risk portfolios that boast a steady return, which is often better than a money market fund. In recent years, a growing number of 529 plans have begun offering a stable value fund portfolio for college savings investors. During recent market changes, these funds were one of the few investments that produced a positive return.

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A Citibank sign in front of one of the company’s offices in California.
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Over the past decade, rising household incomes have helped boost the consumer goods sector, providing a great investment opportunity for those who know where to look.
TipRanks recognized Wall Street’s 10 best analysts in the consumer goods sector for identifying the best investment opportunities. These analysts outperformed their peers with their stock picking and generated significant returns through their recommendations.

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TipRanks used its Experts Center tool to identify the pros with a high success rate, and analyzed each stock recommendation made by analysts in the consumer goods sector over the past decade. 
The ranking highlights the analysts’ ability to deliver returns from their recommendations. TipRanks’ algorithms calculated the statistical significance of each rating, the analysts’ overall success rate and the average return. Further, each rating was measured over one year.

Top 10 analysts from the consumer goods sector

The image below shows the most successful Wall Street analysts from the consumer goods sector.

Arrows pointing outwards

1. John Baugh – Stifel Nicolaus 

John Baugh tops the list. Baugh has an overall success rate of 63%. His best rating has been on RH (NYSE:RH), a leading retailer of luxury home furnishings. His buy call on RH stock from March 31, 2020, to March 31, 2021, generated a solid return of 493.8%.

2. Paul Quinn – RBC

Paul Quinn is second on this list and has a success rate of 58%. Quinn’s top recommendation is Interfor (TSE:IFP), a Canadian company offering a diverse range of lumber products. The analyst generated a profit of 440.2% through his buy recommendation on Interfor stock from May 8, 2020, to May 8, 2021.

3. Anthony Pettinari – Citi

Citi analyst Anthony Pettinari ranks No. 3 on the list. Pettinari has a success rate of 69%. His best recommendation has been on Lennar (NYSE:LEN), a home construction company. The analyst generated a return of 161.2% through a buy recommendation on LEN from April 15, 2020, to April 15, 2021. 

4. Sam Poser – Williams Trading 

Sam Poser bags the fourth spot on the list. The analyst has a 53% overall success rate. Poser’s best recommendation has been on Crocs (NASDAQ:CROX), a footwear company. His buy call on CROX stock generated a 375.5% return from May 13, 2020, to May 13, 2021.

5. Martin Landry – Stifel Nicolaus

Fifth-place analyst Martin Landry has a success rate of 57%. His best recommendation is Canopy Growth (TSE:WEED), a Canadian cannabis company. The analyst delivered a profit on this stock of 580.8% from Sept. 8, 2017, to Sept. 8, 2018.

6. Toshiya Hari – Goldman Sachs

Taking the sixth position is Toshiya Hari. The analyst has a success rate of 62%. His top recommendation was for leading chip company Nvidia (NASDAQ:NVDA). Through his buy call on NVDA stock, Hari generated a solid return of 206.4% from June 2, 2016, to June 2, 2017.

7. Chip Moore – EF Hutton

EF Hutton analyst Chip Moore is seventh on this list, with a success rate of 61%. Moore’s best call has been a buy on the shares of Plug Power (NASDAQ:PLUG), a company focused on developing hydrogen fuel cell systems. The recommendation generated a return of 382.5% from Sept.19, 2019, to Sept. 19, 2020.

8. Michael Swartz – Truist Financial 

In the eighth position is Michael Swartz of Truist Financial. Swartz has an overall success rate of 49%. The analyst’s top recommendation is MarineMax (NYSE:HZO), a retailer of recreational boats and yachts. Based on his buy call on HZO, Swartz generated a profit of 609.6% from March 20, 2020, to March 20, 2021. 

9. Nik Modi – RBC

Nik Modi ranks ninth on the list. The analyst sports a 65% success rate. His top recommendation has been on Boston Beer (NYSE:SAM), offering craft-brewed beers. The buy recommendation generated a return of 230.2% from March 23, 2020, to March 23, 2021.

10. Mark Astrachan – Stifel Nicolaus

Mark Astrachan has the 10th spot on the list, with a success rate of 65%. Astrachan’s best call has been a buy on shares of Celsius Holdings (NASDAQ:CELH), a consumer packaged goods company focused on lifestyle energy drinks. The recommendation generated a return of 174.5% from May 11, 2022, to May 11, 2023.

Bottom line

Investors can follow the ratings of top analysts to help them make an informed investment decision. We will soon return with the top 10 analysts of the past decade in the service sector. More

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Company: Shake Shack (SHAK)

Business: Shake Shack owns, operates and licenses Shake Shack restaurants, which offer hamburgers, chicken, hot dogs, crinkle-cut fries, shakes, frozen custard, beer, wine and other products. The company was originally founded in 2001 by Danny Meyer’s Union Square Hospitality Group. The company has owned restaurants in every region of the U.S. and licensed locations across the Middle East, Asia and the United Kingdom.
Stock Market Value: $2.76B ($65.40 per share)

Activist: Engaged Capital

Percentage Ownership: 6.6%
Average Cost: n/a
Activist Commentary: Engaged Capital was founded by Glenn W. Welling, a former principal and managing director at Relational Investors. Engaged is an experienced and successful small cap investor and makes investments with a two-to-five-year investment horizon. Its style is holding management and boards accountable behind closed doors.

What’s happening?

Shake Shack entered a cooperation agreement with Engaged. As part of that agreement, the restaurant chain appointed Jeffrey D. Lawrence, former CFO of Domino’s Pizza, to its board and agreed to work with Engaged to identify an additional mutually agreed upon independent director to appoint to the Shake Shack board with restaurant operations experience.

Behind the scenes

Shake Shack is an iconic fast-casual restaurant founded by a culinary visionary, Danny Meyer. Through Union Square Hospitality Group, Meyer founded and operated some of the most critically acclaimed gourmet restaurants in the world for many years. Over the past 20 years, he and his team have developed one of the greatest casual hamburger chain restaurants in the country, Shake Shack. They took Shake Shack public in 2015 with 63 restaurants and have expanded to 436 restaurants in eight years.

Much of the senior management team came from Union Square Hospitality Group and the fine dining industry. Perhaps most notably the CEO, Randy Garutti, has a long history working with Meyer and was the general manager at Union Square Café and Tabla in New York City. The problem is that the same skillset required to create a brand and run upscale, gourmet restaurants is not the same skillset needed to operate and scale a quick-service restaurant. In fact, some might say it is a completely opposite skillset. Accordingly, restaurant margins at Shake Shack have declined by 790 basis points since 2018 and corporate return on capital has gone from greater than 30% to less than zero today. As a public company, Shake Shack has significantly underperformed both the market and its peers.
The good news is that the hard part – creating an iconic brand – has already been done. Not many people can do that. The easy part – scaling an already strong and growing brand – has been done by innumerable people, many of whom are available to do it again. This means getting a board that is focused on putting together a management team with experience operating and expanding quick-service or fast-casual restaurants and holding that team accountable if they do not succeed.
To that end, Engaged announced that it had identified three new director candidates and was pushing for the company to retain an operational consulting firm. One of these candidates, Kevin Reddy, has extensive experience operating and growing restaurant chains like Chipotle. Another candidate is a co-founder of Engaged, and the other is an experienced advisor and consultant. Because the board is staggered, only four of 11 directors are up for election this year. That is only the tip of the iceberg of the challenges Engaged faces in this campaign as this is as bad of a corporate governance structure as we have seen in a public company.
Meyer controls just under 9% of the company’s shares, but he holds special rights over corporate actions that far exceed his economic ownership, including (i) the ability to appoint five directors; (ii) the ability to designate 50% of the members of each committee of the board; (iii) hiring or firing the CEO; and (iv) increasing or decreasing the size of the board. In other words, this is Meyer’s company and only he can make significant changes.
As a result, this is a crusade of persuasion for Engaged. Engaged had an opportunity to go to a proxy fight and have the shareholders replace three incumbent directors, including the CEO, with new directors. While this would not have given Engaged or the new board the power to overrule anything Meyer and his incumbent directors wanted, it would have sent a strong message to them that the shareholders expected change. Instead, Engaged settled for one director who was not even one of the three they proposed and a second to be agreed upon, which also will not likely be one of the three the firm proposed.
This is a definite victory for the company as there is very little one director could do on a board like this. It allows Engaged to claim a win, but the firm is still reliant on Meyer’s decisions, and it lost a valuable opportunity to send a message to management. This effectively changes nothing and gives Engaged no more power to institute the changes it so astutely identified to create shareholder value. Identifying the problems is one thing and having a path to fix them is entirely different. The path here is completely controlled by management.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. More

Have you ever gotten a free flight because of your Delta SkyMiles card? Or maybe you get the advantage of walking through the quick TSA PreCheck line at the airport instead of waiting on the typically very long general security line because of your Capital One Venture Rewards Card.
About 90% of all credit card spending is on rewards cards. If you play the game right and maximize your rewards, you could save at least a few hundred dollars every year.

“We have created an ecosystem where we have kind of essentially been giving a drug to the consumer, which is these rewards cards,” said Sumit Agarwal, a finance professor at the National University of Singapore. “And the reason we keep giving this drug is we know it’s highly profitable and we know the consumer is addicted to it.”
More from Personal Finance:5 ways to start paying down credit card debtDoes America’s credit habit make a recession inevitable?What to do as credit card rates keep climbing
In 2019, in return for all the spending on these types of credit cards, the largest U.S. banks paid out nearly $35 billion in rewards. But where’s that money coming from?
In that same year, banks reported more than $140 billion in revenue from all credit cards. That is from three main revenue sources: $9.9 billion in fee income, $89.7 billion in interest income and $41.3 billion from interchange, or swipe, fees. More than half of that revenue comes from rewards credit cards, according to Agarwal.
Agarwal and other economists, in a study, concluded the rewards credit card system creates an estimated annual redistribution of more than $15 billion from less to more educated, poorer to richer, and high- to low-minority areas — widening existing disparities. That means there’s $15 billion that could be distributed in a different way to achieve greater equality. 

“Low FICO [credit score] customers are essentially spending so much more on these reward cards to get access to the rewards, which is only 2% or 3% of the total value of the spending, that they accumulate debt and that debt accumulation causes … this huge interest payment that is going to the bank,” Agarwal said.
“It’s also going to the high FICO score customers, because these high FICO score customers are only using these rewards but not accumulating any debt,” Agarwal said.
“So they are being cross-subsidized in the process of using their reward cards,” he added.
But Andy Navarrete, executive vice president and head of external affairs at Capital One, said there is no cross-subsidization and that rewards cards at the bank are designed to be independently profitable.

We have created an ecosystem where we have kind of essentially been giving a drug to the consumer.

Sumit Agarwal
finance professor at the National University of Singapore

“While there are certainly customers who choose to borrow on their credit cards, that is not typically the revenue streams that are funding rewards cards,” Navarrete said.
“The flawed premise behind this study was that those who are carrying balances and therefore paying interest are actually cross-subsidizing or, you know, contributing to the profitability of rewards programs overall,” Navarrete added.
“That is actually not the case,” he said.
Watch the video above to learn more. More