Are Credit Card Rewards Funded By The Irresponsible?

Posted by The Happy Rock on July 25, 2008

If you're new here, you may want to join hundreds of other readers and subscribe to my RSS feed or my free email subscription to receive free updates. Thanks for visiting!

I have already shared my analysis of the best cash back credit card, and for those of us that have the financial discipline and habits to not overspend and pay off the bill each month, credit card rewards can be a nice bonus with relatively little effort.

My question is whether or not the fiscally responsible are living off the debt and fees of the fiscally challenged. Before you dismiss me or get up in arms, let’s take a look at the math.

Credit card companies card charge about 2% give or take for interchange fees on each transaction. By spending about just $1,000 to $2,000 a month on a Chase Freedom card you can easily earn over 2% back in cash. For someone like me who never pays a penny in fees or interest it seems like Visa is actually losing money.

If they are losing money on me and the rest of the hard core rewards crowd, they must be making a fortune off someone else to compensate. Their profit most likely come from people who get rewards card for the cash back or points and end up carrying a balance. Profits also come from those that are paying late fees, annual fees, and those that get hit with high interest rates. Finally they also make a profit on transactions that don’t have rewards attached to them like regular credit card charges and debit transactions.

Does the math add up? Do you agree? Does it effect the way that you view credit card rewards?

» Filed Under Credit Cards, Psychology of Debt

Trackbacks/Pings

Friday Link Love - Leaving Town Again Edition | One Caveman's Financial Journey on July 25th, 2008 11:03 am
Saturday Link Love: Tales From The Web Edition (Ask Mr Credit Card’s Blog) on July 26th, 2008 4:18 am
Festival of Frugality #136 - Summer School Edition | Student Scrooge on July 30th, 2008 2:50 am
Saturday Links | Counting My Pennies on August 2nd, 2008 6:03 am

Comments

13 Responses to “Are Credit Card Rewards Funded By The Irresponsible?”

Christine (1 comments.) on July 25th, 2008 6:52 am

It’s a business. They would stop offering rewards in a heartbeat if they were actually losing money on the deal.
That 2% cash reward is probably skimmed off the top of the guy who’s still paying 29.5% (and late fees) on that cash advance he used to pay the rent back in November ‘07.
Meoip on July 25th, 2008 7:51 am

The credit card companies make money by charging more to swipe Rewards Card. When I looked into taking Credit Cards for work the reward cards fees were about 1% higher than a standard credit card. So it’s not the irresonsible consumers that are funding your thrift it’s the stores, especially the smaller ones, that take the hit.
Once the card company gets your extra one percent I’m sure they pitch it into a high interest holding account until they pay you at the end of the month, quarter, 6th month or year depending on the card.
If you spend $1000 at Pops Books and us your rewards card Pops Books gets charged $25.20 (there is a .20 transaction fees) if you use your standard card it only costs them $15.15. The Card company takes the extra $10 which you are owed say $10 in rewards back and palces it in a holding account that earns 5% interest, they hold it for a month to earn $.50 on it and then give you $10. They just made $.50 and multiple that over a few millions and they do well.
plonkee (6 comments.) on July 25th, 2008 8:01 am

Yes, I’m sure they’re making the money that’s used for rewards on the people that pay lots of interest and fees. It doesn’t affect the way I feel about using rewards because I’m pretty sure the credit card companies aren’t going to reduce their charges if they scrap rewards systems.
Sue (28 comments.) on July 25th, 2008 9:03 am

I guess I don’t exactly understand the question in your post. The credit card company wants to have you as a customer. They do rec. money on the purchase by the person who you are buying the product or service. A certain percentage of every sale goes to the credit card company. That is why some establishments try to head off consumers from using credit if the is under a certain dollar amount. They are being charged to accept by credit card.
Sue (28 comments.) on July 25th, 2008 9:10 am

I reread your post. Looks like you are aware of the charges put on the seller.
Sue (28 comments.) on July 25th, 2008 11:39 am

Interesting question? Are they currently earning money from you? We will assume not if you only used the credit card for items that you get 3% back but if you use the card for things that don’t qualify for the 3% back then yes.
There is always the potential to finance.
Pete @ biblemoneymatters (26 comments.) on July 25th, 2008 12:40 pm

Rewards credit cards are not a good thing for most people because they end up spending more (because hey, i’m getting rewards!), and often don’t even claim the rewards. I wrote a post about this a while back. Linked in my name.
Double Eagle (15 comments.) on July 25th, 2008 1:36 pm

In general, credit card companies are blood sucking leeches. If you’re not paying a penny in fees or interest but are getting reward bonues, then someone else is footing the bill.

However, we’re all in charge of our own financial destiny so I wouldn’t feel guilty about it. Also, if you think about it, there’s not much difference between that and walking into a department store and haggling 15% off a large cash purchase. The fact that most other people paid full price means they can give you a discount. If they gave everyone the discount (”reward”, if you will), then they’d be out of business.
Mommychicky (1 comments.) on July 25th, 2008 6:03 pm

As a former employee of a major credit card bank, I don’t have a bit of pity for the issuers. Trust me, they are making there money and then some. Now, would I ever get involved in a rewards program that charged me to participate? Heck no. But I will be the first to admit that when I started working for said bank and realized that if I started using my fee free rewards credit card the same way I used cash/debit, I could get something back for things I already had to buy, you bet I started using that card. On the issue of whether these programs are funded by those who are irresponsible, honestly most of the credit card industry is funded by those fees and we each decide how we handle credit. It’s really too late now to turn back from the lure of easy credit, but that shouldn’t stop us from being educated consumers and opposing the outrageous fee structures present on todays cards. (Even if they are buying art and antique cars for the CEOs of the issuers :0)