eli5 How do credit card companies make money out of people that pay their cards in full before the billing cycle and still get rewards?
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To tell you the percentages – ranges from 1.5% for debit cards and most Visas and Mastercards for a lower risk merchant (business that accepts cards) to more than 3% for American Express premium cards. If the merchant is in a higher risk industry for chargebacks and/or has more of a history of chargebacks, they get charged more. Accepting cards with more points, perks, and cash back tends to cost more.
Plus merchants usually pay a transaction fee of $.25-$.50.
I worked for a company whose biggest customer insisted on paying an average $100,000 bill each month with an Amex, and it was costing us over $3,000 in fees. We were able to negotiate it down with Amex.
The interest they charge is the big money, but even if everyone paid their cards off monthly the card companies would make money even after paying on the points and perks, which are usually no more than 2% cash value (and that’s if you play the game carefully). Sometimes there are additional deals and discounts but the merchants themselves pay for those (ex: if Peleton offers 20% off to Amex members for a year)
Some of the prestige cards are also HIGH annual fee – $700 a year or more.
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