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How do rewards credit card companies make money?

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Every time you make purchases on your credit card you gleefully add the miles you’ve just earned in your head and estimate when you’ll finally be making that dream vacation. Ever stop to wonder how your generous credit card company can afford to give you all of these rewards and still remain profitable?

Rewards and perks are important to everyone who uses a credit card. Everyone wants to have it all and not let a single mile go to waste.

In this article we will explain five ways rewards credit card companies make money and hand out rewards to everyone without going broke.

5 Ways Rewards Credit Card Companies Make Money

Interest Rates and Individuals with Debt

While you may be a prudent cardholder it is an undeniable fact that most people simply are not. The less attentive credit card users eventually start racking up a huge debt on their plastic every month.

Fact: the average interest rate on credit cards is 15%.

This is one of the primary ways rewards credit card companies make money right off the bat. A huge debt with a 15% interest rate amounts to a fortune. Then you multiply this fortune by the individuals with debt and you get $130 billion in earnings per year.

Never-ending Fees

Once you miss your first payment you’ve welcomed yourself into the world of credit card fees. Rewards credit card companies make a ton of money from the unending list of fees they charge cardholders. They’ve got fees for every letter of the alphabet – annual fees, balance transfer fees, cash advance fees – you get the idea.

Information for Sale

Rewards credit card companies make money by selling customer data to anyone willing to pay for it. This predominantly includes marketing firms and business analytics organizations. The good thing is that they are not lawfully permitted to provide specific customer details. The type of information that they monetize on is data on purchases made.

Transaction Charges Are A Thing

The best way to charge all customers, regardless of how good their credit card habits are, is to enforce transaction charges. The underlying principle here is to charge a percent of the total transaction made on the credit card. Foreign transaction charges are generally higher than nationwide ones.

Advertisements and Promotions

The last biggest way rewards credit card companies make money is by marketing promotional offers for their business partners. In general, airlines and hotels are credit card companies’ favorite partners (hence miles and hotel points).  Whichever the case may be, credit card companies charge them a fee for advertising their products and services to cardholders.

Wrapping it Up

The reason credit card companies offer these impeccable rewards in the first place are to acquire more customers. More customers mean more money. Rewards credit card companies make money from all of the ways we have described in this article. What you have to do is maintain excellent credit card habits and earn rewards without paying them any fees.

 

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