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?

In: 808

Answer 1

Three possible ways, which can be combined if the card issuer wants:

1 – Transaction fee Stores pay about 1-2% for Visa, a bit more for Amex. You charge $500 a month, card gets ~$7.50 in revenue.
2 – Card fee (annual charge) At least another $5/month
3 – The 50% of card users who do end up carrying a balance pay 20% or more in interest rates annually, subsidizing those who don’t. You carry a $500 balance for a year, and it only looks like $8.50/month on your bill, but it’s $100 by the end of the year.

Even on a no-fee card, a user who charges $500/month on his card generates close to $90/year if he never pays interest. If he starts carrying a balance, that number can double easily. And $500 is not a lot of money.