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
There are many close answers, but none that are correct so far.
Most credit card companies don’t care if you pay in full, because they aren’t holding the debt. When you get a Visa card from your bank, Visa isn’t holding your debt and collecting the interest. The bank is the one doing that. Visa makes its money by collecting credit card fees from retailers. The retailers are willing to pay this because cash is for hookers and drug dealers, and most want to expand their customer base.
AMEX, on the other hand, is actually the issuer of the card and does hold your debt. So, they do care if you incur interest penalties or not. They also care if you pay off that debt. But as long as most people aren’t paying off in full each month or defaulting on their payments, they’re not in any danger.
However, even if you pay off your balance in full, they are still collecting exorbitant transaction fees from retailers. This is why (in the US) you are more likely to see a retailer who doesn’t take AMEX than Visa.
The majority of people don’t pay the full balance each month so they don’t impact the banks that much. So how do they make their money?:
Retailer:
– most cards have a 2 – 4 % charge on every purchase. Points cards add 2% or more. American
Express historically has the highest fees
– terminal fees. A high transaction card reader can cost up to $1,000 a month. Slower
terminals cost less but in high-volume small stores, the slower speeds limit the number of
customers that can be processed and those few seconds add up over time.
– bank fees
Card holder:
– yearly card fees
– cardholder interest rates.
So the banks have multiple revenue streams on credit cards. I don’t think that the banks are too worried about the loss in revenue from monthly interest charges. 🙂
Latest Answers