The Mystery Behind Credit Card Rewards

By Sanesh Mathew | March 19, 2018

Where do Credit Card companies get the money to pay for the rewards and perks that they offer? Let’s find out.

The Mystery Behind Credit Card Rewards

Have you ever wondered how Credit Cards offer drool-worthy joining perks and reward programmes? No, it isn’t magic! In fact, there’s a logical explanation. In this article, we’ll explore the different methods Credit Card issuers employ to procure money to pay for the rewards and other perks that they offer.

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#1 – You

Would you believe it if we told you that Credit Card companies usually make most of their money from their customers? Whether you believe it or not, it’s true!

There are two ways that Credit Card issuers recoup the money they spend on rewards and perks. By charging fees and through interest payments. Credit Card companies earn a fortune, especially from the latter alone. This is because most customers don’t pay their outstanding balances in full.

Fees

Are you aware of the different fees associated with your Credit Card? No? Well, here they are:

Annual Fee – An annual fee is charged for the benefits and convenience that your Credit Card offers. It varies from card to card.

Cash Advance Fee – This fee is charged if you withdraw money from your Credit Card. It usually comes with a high rate of interest.

Late Fee – Missed paying your minimum balance before the due date? A late fee will be charged by your Credit Card issuer.

Foreign Transaction Fee – Making any purchase (even online) in foreign currency attracts a foreign transaction fee.

In addition to these common types of Credit Card fees, there are other fees such as over-limit fees, which are charged if you use more than your card’s credit limit, card replacement fees, in case your card is lost or stolen, etc.

Interest

Interest is charged on transactions done using your Credit Card. If you’ve been thinking that converting your big purchases to easily-payable EMIs is advantageous, think again! With the interest rate applicable on your EMI transactions, you usually end up paying your card issuer much more than the actual cost.

For instance, if you bought a smartphone worth Rs. 50,000 and converted the purchase to EMIs for 6 months at an interest rate of 13%, you’ll end up paying approximately Rs. 53,000 at the end of the tenure.

Since the interest rate on Credit Cards is generally very high (they can go up to 40% or more), even small defaults or late bill payments will cost you a lot. But, at the same time, it is an advantage for card issuers. The more late payments/minimum payments/cash withdrawals/EMI conversions you make, the more money they earn.

What You Can Do

If you want to enjoy the perks your card offers and avoid unnecessary charges, then here are a few tips:

  • Always pay your outstanding balance in full and on time
  • Choose a card with no annual fees if you aren’t a big spender. Unless you spend enough to earn more rewards than the fee you pay yearly, it doesn’t make sense to own a card with an annual fee
  • Do not take a cash advance on your Credit Card
  • Do not exceed your credit limit. Actually, do not utilise more than 30% or 40% of your credit limit

Additional Reading: 8 Shocking Myths About Credit Cards & Credit Card Rewards

#2 – Merchants

Has a merchant ever charged you an extra 1% or 2% if you use your Credit Card to pay for your purchase? It is usually because card issuers charge merchants for transactions made using their cards. But ultimately you are the one who is paying the card issuer, and not the merchant. Although this is not common in India, there are quite a few merchants who charge an extra amount for card payments.

Shopping abroad with your card? Merchants abroad will charge additional fees on purchases you make using your Credit Card. These foreign transaction fees are also a revenue source for your card issuer.

#3 – Promotions

Carrying out promotional activities on behalf of their partners is another revenue source for Credit Card companies. Airline companies, retailers, and hotel chains usually pay Credit Card issuers to promote their deals to cardholders.

In A Nutshell

Credit Cards offer great rewards, cashbacks and more. But if you want to make the most of these perks, then you have to use it wisely. It is also necessary that you choose a card that best suits your lifestyle to make the most of it.

Bonus Read: 15 Awesome Credit Cards With No Paperwork

At BankBazaar, we let you compare cards from different banks. Click the link below to get started.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.
Category: Credit Cards
Sanesh Mathew

About Sanesh Mathew

A talkative sleepyhead, Sanesh, enjoys watching horror movies, listening to music, reading all things related to personal finance and wandering aimlessly (walking meditation, he calls it!). He refers to himself as a 'simple human being with a rather chaotic mind'.

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