Credit cards are giving you at least 2% back and, on some occasions, even more. But where do your rewards actually come from? Banks are as tight as they come, and the tooth fairy is limited to a buck per tooth. Fortunately, the Wall Street Journal did an article on the subject.
Funding Your Bonuses
There are no free lunches (unless you use your credit card points to pay your bill) and there are no free rewards. So who is paying for your rewards?
- People without credit cards: Merchants pay interchange fees whenever you use your card, and they don’t want to pay those fees themselves. In particular, rewards cards charge higher fees than non-reward cards. But merchants don’t know which card you are going to use and can’t adjust prices instantaneously based on your payment option, so they raise prices on everyone.
- Merchants, particularly smaller one: Merchants have to accept at least a portion of the fees themselves. It’s tough to pass through 100% of the fees. Small merchants see a higher percentage of their revenues eaten up by fixed costs.
But What Do They Miss?
But the article barely comments on what may be the most significant factor when it comes to paying for your credit card rewards: interest payments. According to Value Penguin, the average household that carries a balance from month-to-month has over $16,000 in revolving credit.* If you spread that out across the whole country, the average debt per household is $5,700. In other words, more than one-third of households are carrying credit card debt and, on average, they are carrying a lot of it. Per the Federal Reserve, interest rates on credit cards average 12.5%, which means that the average debt-carrying household is paying close to $2,000 in interest alone.
There is no rewards program in the world that offers you anything to justify paying that sort of interest level. Remember, you only earn rewards on the purchase, not the interest payments.
Control what you can. You can’t dictate a merchant’s pricing but, if you’re reading this site and carry balances from month to month, you’re at the wrong blog. Remember, banks are willing to accept unprofitable customers as the cost of doing business. Be one of those people.
**Beginner’s Hint: Credit card debt is known as “revolving” because it becomes available again as soon as you pay it off, as opposed to one-time loans, which are fixed.
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