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?

Question

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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Answer 1

Another way to look at the situation:

Credit card companies are not in the business of helping regular people pay with cards. They are in the business of trying to get stores to buy into their proprietary payment network.

Business have to pay a fee for the privilege of being able to swipe cards and use the credit card company’s payment network. This is often some fixed percent of the transaction price (say, 3%). If a business signs up to use a credit card service, they have two options: eat the fee and raise all of their prices to compensate, which could scare off customers, or charge a “convenience fee” on customers who want to pay with cards, which again, could scare off customers.

This seems like a lose-lose. The card companies have to sell this system as something the stores would want to buy. They do that by pointing to how many people use their cards and say, “Man, look at all these people who want to buy things with our cards. You’d lose out on all of them if you didn’t pay for our services…”

If this is to be convincing, the card companies need as many people as possible on their card network. If there aren’t that many cardholders, the stores can just say, “Ha, I don’t care if I lose your customers, there’s barely any of them!” and they won’t pay for the service. So card companies try to inflate their numbers by giving gifts to their cardholders. That’s what reward points and miles and cash back *are* — basically, the card company is bribing people like you to use their network, to prop up their number of users and make their service look more attractive to stores.

So even if you are a “freeloader”, never paying the credit card company any interest or late fees, they’ll still reward you, because you’re not the only way they profit from you using the system. Just your being part of the network alone is profitable, because in addition to being their customer, you are, in a way, also their product.