HomeBlogUncategorizedWhy Do Credit Card Companies Offer Rewards? It Makes Them Money!

"Why do credit card companies offer rewards?"

Why Do Credit Card Companies Offer Rewards? It Makes Them Money!

by / 0 Comments / Mar 14, 2015

You may wonder,Why do credit card companies offer rewards? Don’t they lose money on the deal? Hardly.
Trust me, credit card issuers know what they’re doing. Sure, some customers will use their credit cards to come out ahead via the company’s rewards programs. To do that, the cardholders just have to charge quite a lot but remain debt free by paying off all of those balances in full each billing cycle. Yet as of August 2014, the average credit card debt was $15,000, so a whole lot of people are adding to the companies’ revenue stream by paying plenty of interest expense, thank you very much. Why do credit card companies offer rewards? Because they make money off this debt.
So why do credit card companies send out offers? There are other reasons the issuers are more than delighted to pay you to shop with their cards – and here are the most compelling:

  • Transaction fees.
    Each time you use your card, the merchant pays the credit card company a fee equal to a percentage point or two. Even if you pay the debt down to zero in 25 to 30 days so you don’t have to pay interest expense, the issuer is still guaranteed a profit from the transaction fees. Wonder why do credit card companies offer rewards? This fee sure helps.
  • Company loyalty.
    There are countless cards on the market, and if your credit is good to excellent, credit card companies know that you have the world of plastic open to you. A program where you get a lot of cool stuff can keep you a loyal (constantly charging) customer.
  • Cheap things.
    Many rewards programs allow you to use your points for tangible items like electronics, jewelry, and things for the home. Those kitchen knives you order with the points may have a list value of $100, yet because the credit issuer has a relationship with the company, the wholesale value is half that – or less. This is not a bad thing for all involved, but you shouldn’t worry about the issuers losing money.
  • Dormant points.
    And last, credit card companies know that many of their cardholders will never use all or even some of their points – so they won’t be out a dime. According to a study by the marketing firm Colloquy, just over a third of the 48 million already earned rewards points go unused. According to their calculations, that about $16 billion left on the credit issuers table.

Wonder why do credit card companies offer incentives? Now you know.
I have no quibble with a prosperous business. Hooray for making money! Now it’s your turn. Use your points well, shop smartly, and maintain a debt-free lifestyle. Do that and you’ll come out ahead financially, too.

About the Author

Erica Sandberg is a renowned personal finance editor, advice columnist, and reporter. She hosts her own video program, Making it with Erica, and is a frequent guest on national news shows, from Fox to CNN. Her book, Expecting Money: The Essential Financial Plan for New and Growing Families was the first to address the specific financial needs of new parents. Erica is the spokesperson for some of the finest businesses and products in the U.S., including Western Union, the Better Business Bureau, Bank of America, CVS Pharmacy, Michael Minna Restaurant Group, Bounty paper towels, Chase Card Services, and Assurant Solutions. Prior to her her current journalism career Erica was affiliated with Consumer Credit Counseling Service of San Francisco for ten years.

Ask the author a Question

Leave a Reply

Your email address will not be published. Required fields are marked *

Copyright © 2014 Credit Cards . All rights reserved.

Advertiser Disclosure: The credit card offers that appear on CreditCardIdeas.com are from credit card companies from which this site receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This site does not include all credit card companies or all available credit card offers.

Editorial Disclosure: The editorial content on CreditCardIdeas.com is not provided by any bank, credit card issuer, airlines or hotel chain, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone, not those of the bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.