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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They charge businesses a % fee for each transaction that uses their card network. The business has the option to eat this fee themselves, or pass it on to you. Bigger companies will eat the cost or adjust product prices to hide it, because the convenience cards offer consumers causes them to buy more. So in exchange for eating the fee, they sell more product.
This is why smaller shops charge an extra fee when you try to use a credit card or gas stations offer a discount for people to use cash. They don’t get the increase sales when people use cards or the profit margins are already so tight the fee can really hurt them.
There’s also your data card companies can sell to businesses and marketing groups. Rewards are an investment that gets them more users and gets them more data to sell for a net gain.
Finally there’s the bigger picture of how much they pay out compared to the people they can charge interest. They entice more people to use the card with rewards which gives a larger chance of having more people that don’t clear the balance and get charged interest. The people they get to charge interest to outweighs the responsible ones that pay things off by a lot. Generally more than half of the population carries a balance that results in interest. When your interest rate is around 20% and the reward is only 2% that’s a pretty solid trade for them.
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