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 get a percentage of each transaction from the store. There are also yearly fees for a lot of the “fancier” cards. And there are a LOT of people who don’t pay their balance on time, and those interest rates take care of it for everyone else.
Credit card companies charge a fee for credit card transactions, with a small transaction fee plus a percentage of the value of transaction — something like 50 cents plus 3% of transaction amount. Then the credit card company basically gives the customer 1/3 or 1/2 that fee.
There are also sometimes annual fees in credit cards that help offset the rewards, you pay $80 or $100 a year for a card with a better rewards program. Some people spend enough to earn that all back and then some, others do not.
Credit card companies take a percentage of the cost as a processing fee. This is typically 1.5% to 3.5%. Guess which card give 2% cash back…
Also, the business pays a transaction fee to a credit card processor that’s typically a couple of cents or lower per transaction. Also, businesses are prohibited by their credit card agreements from charging a lower price for cash customers. So this fee is spread out across all of the business’s customers.
Former employee in your wallet.
Late payers, overdrafters, and folks who do not pay in full each month are the most lucrative, but even folks who pay in full each month add to the bottom line via service fees charged to the vendor. I always ask local businesses if they would prefer a check or cash over a debit/credit card because the fees cut into the local business’ bottom line.
they don’t* – but people who actually do this every month are an extremely small slice of their overall customer base.
* they technically collect transaction fees on every purchase, so they don make a small amount on even customer who don’t carry a balance, but that’s negligible compared to fees and interest they charge on those who do
To put things in perspective, any business in America that sees at least 50% of their sales in credit will pay at minimum, $1,000 a month to credit card companies.
For a typical small, local restaurant, that little 3% processing fee actually ends up being 10-30% of your overall profit…
The credit card companies (Visa, Mastercard, Discover, etc.) get a percentage of every transaction plus usually a small fee. This is paid by the merchant. Whether or not you pay off your credit card in full each month is irrelevant to them.
Any interest or fees you pay (late payment fees, balance transfer fees, etc.) go to the bank that issued your credit card.
Those people are known as “freeloaders” in the card industry. The card user gets all the good stuff basically for free. It’s the smart way to use your card. The people who only pay minimum payments pay so much interest and there are so few freeloaders that it all balances out for the card company, they still make tons.
Even if they lose a bit of money on some people, the vast majority of credit card holders who don’t pay off the full statement balance each month and end up paying interest and/or other fees are probably more than enough to offset that.
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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