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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A lot of good responses here. Don’t forget about “friction”.
Friction is the ease of use. Dave Ramsey highlights these behaviors fairly regularly.
1. Cash=highest friction. Activates subconscious pain centers of the brain, meaning you are less likely to spend it. Akin to touching a hot stove, it hurts you emotionally whenever you hand over cash money.
2. Debit=middle friction. Activates less pain centers in the brain because it is connected to your checking account.
3. Credit=least friction. (Online shopping with a credit card on Amazon represents the absolute least friction possible, BTW) Least pain response in the brain, freely spending is easiest. You do not comprehend as much of a subconscious connection to your finances or wealth. What this means is you will use it more, and this is the goal of the cc company, maximum utilization for every card holder.
They don’t really, they’re likely breaking even. That’s why they call these people deadbeats
Credit card story time.
Buddy of mine in the Bay area had a chain of 40 dry cleaners, this is back in the late 80’s. He would not accept credit cards because of the two and a half percent charge the credit card companies demanded, and he only worked with a 5% profit margin. So he only took cash and checks. (Very common back then),
One day a credit card company came in and said they would do a 3-month trial and would charge him nothing if he terminated it after 3 months.
First month his profit went up 3%
Second month it went to a total of 5%
And by the third month it was up to 7%
He decided to do it and when they came in he got them to sign the contract for 2% he told them he couldn’t figure it out completely yet but that his profit had gone up.
The salesman told him that’s because employees can’t steal money if it’s not cash.
He was losing 7% of his money to theft…
Edit.
So his profit went up to 12% from 5% because of credit cards,
he’s really rich now…
Also, its a numbers game. I set ALL my rewards cards to “autopay” so I never miss a payment. However, the interest rates on “rewards” cards are typically so high that a single missed payment can “make up” for a heck of a lot of rewards.
Basically, the amount of people that don’t pay in full is enough to make money, in addition to the other fees people have described.
Credit cards still have an annual fee. The people who defer payment are the ones who keep the system afloat.
Credit Card companies also have all your purchasing history and can target ads directly related to something you were likely to be purchasing or in the market for.
they take 2% of all transactions and prey on teh poorly financed. basically your benefits are coming because some poor guy cant pay his bills or some douche bought a 55in tv he can’t afford
They make their money from the other 99 percent of customers. The benefits are a loss leader- you give a little to incentivize purchases and let the chips fall where they may.
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.
They dont really, they probably break even with surcharges. But the majority of people dont pay their card off, so credit card companies make plenty of money.
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