Ever wonder how credit cards can give 2% cash back and still be profitable?Well, this post will attempt to explain that. But first, it’s important to understand how it works, so you can bend the rules to your advantage. Anyways, here it goes:
The most obvious way credit card companies earn money is interest. Many credit card users spend more than they have, so they end up paying it off over the span of month, or more likely, years. Meanwhile, the credit card company collects compound interest, meaning previous interest is included when the new interest is calculated. So, in the short term, the credit card company loses money, but they earn a ton in the long run.
Another way many people aren’t aware of is merchant fees. I believe this is one of main reasons credit cards began to offer cash back. For each purchase you make, your credit card issuer charges the merchant a certain percentage of that purchase. You get a part of that, and the credit card company gets the rest. The other reason I believe that credit cards starting offering cash back is to get people to spend more money. If you’re debating buying something, that cash back gives you a reason to go through, and get into debt. That debt turns into interest, which turns into long term profit.
After learning how credit cards earn money, it really made me wonder why credit card issuers charge interest at all. If they already make, say 1% of all your spending(after giving you one or two percent), doesn’t that make them enough? Well, it probably would, but in the meantime, they’re getting money from both, and it’s working well for them, so why stop something that is highly profitable? They don’t have a good enough reason, so they won’t.
Credit card companies, if you’re reading this, here’s a thought: If you can offer 0% APR for a lifetime instead of cash back, you’ll get a lot of customers, and money.