How do credit card companies afford to “give cash back”? Like how does the process work?
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“Give Cash Back” is a bit of a misnomer. What they’ll do is credit the account some small (1%-5%) percentage of the amount charged, usually from only a few categories of merchant. They’re already charging ~3% in fees per transaction to the merchant, so that’s often enough to pay for the reward. If the incentive gets people to use that particular card more often, or even better, make it their default card for spending even after the promotion is over, they’ll get that money back and then some.
But the real money in Credit Cards is on the interest when a balance is carried month-to-month. Cards will rarely have less than a 14% Annual percentage rate on balances carried. So you buy a $200 steak dinner on your rewards card, get $10 credited to your account, and pay off the balance over 4 months, they’re pulling in a decent profit off of you. And that’s at the minimum APR. If you’ve ever missed a payment, you may have triggered their penalty rates of 30%+.
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