We’re all familiar with advertisements for ridiculous credit card rewards, like tens of thousands of points or big amounts of cashback. But we’re really curious if you’ve ever asked yourself who does pay for these rewards after all?
So, we’re talking about free money or points, usually used for traveling or other rewards. But are these actually free money? Let’s find out together!
How do card issuers make money?
To start off, let’s presume that card issuers are the ones who pay for your rewards. There are three ways through which they make money and those are interest, fees, and interchange.
Obviously, interest is the most important revenue stream for a credit card issuer and you are well aware of the rate when signing up for a new card. Of course, interest payments can be completely avoided, as they are applied only to outstanding balances, but there are way too many credit card users who don’t do it on time and they end up stacking debt.
As for fees, they come in various forms – like annual fees, late fees, or balance transfer fees – and they are not always avoidable. For those who have an overall bad credit history, their only options remain subprime cards, fees included, while those who want top rewards will have to pay high annual fees.
So, who is paying for your rewards?
Well, this shouldn’t come as a big surprise, but it’s you, in most cases.
“At a minimum, you pay for some of the rewards you earn through increased prices on the goods and services you buy. Card companies charge merchants a fee to accept cards as a payment option, and merchants pass through that cost to you in the form of increased prices,” says Dan Stous, CFP and lead wealth advisor.
Basically, in some situations, “you can earn a lot more than you pay for if you do it right”, when it comes to credit card rewards. So, technically speaking, everyone is charged the same price, but you, as a rewards card owner, you get some of the price back, in points.