How do credit card companies make money on 2% cash back credit cards? It’s even possible to use one of these cards to pay your taxes at a cost of 1.88%, leaving a slight arbitrage opportunity.
Finance charges, fees, and by charging retailers per transaction(depends on volume).
They could pay substantially more than 2% and still be profitable.
What card pays 2% cash back? I haven’t looked in awhile.
Amex will charge a whoppin 6% to small retailers.
MC/Visa are charging 3%.
Credit card companies make money on interest charges, late charges, etc. Some cards even charge an annual fee to use (wtf).
Basically deadbeat customers fund the ability for me to use a credit card free and clear. I have never paid a fee nor an interest charge on a credit card and I maximize my kickbacks with cards like Chase Freedom, Citi Dividend, CapitalOne Rewards, and Barclays Arrival.
On top of the fees…
Drives usage of card --> Drives balances --> Drives interest income
What isn’t profitable is servicing a huge infrastructure for issuing credit cards and then never getting any usage of the card because you’re the 3rd or 4th card out of your clients’ wallets.
That’s insane if Amex charges 6%. grocery store margins are even lower than that!
Fidelity AMEX. Check it out
And don’t be like the regular kids, CvM. Sometimes annual fee is worth it - it’s just a discounted cash flow problem to calculate. Makes it even more fun when the rewards aren’t cash equivalents, then you get into the art of point valuation. Fun stuff
Capital One Spark Business. Fidelity Amex too.
To me, it seems that 2% cash-back cards probably appeal those who pay in full each month. Those who carry balances would favor cards that offer lower interest rates.
It occurs to me that there must be something more than the merchant spread. Maybe they’re selling data?
Rewards cards never make sense for people who carry balances. Only for those who pay it off monthly. And yes, they do get other revenue streams like selling data.
Agreed, annual fees can be worth it. Not too often, but they can. Last year I paid the $100 amex fee on my corporate card so I would accrue the membership reward points for my personal account. Since I was traveling a ton, I got close to 40k points which are transferrable to airline and hotel programs and can be worth a lot more than the fee. The key with annual fee cards is to have one, maybe two, and make sure you are getting the value out of them. What the card companies love are the people who have the Delta Amex or United Chase Visa and pay the ~$100/yr fee for a card they got because they fly once a year.
I have 2 cash back cards, the Chase Freedom and a BoA cash back card. The Chase card recently changed its cash back poilcy which annoyed me. I used to get 10 points (10 cents worth) per swipe, which allowed me to get close to 5% effective cash back (or more) on small transactions. I loved that, but they took it away. Now I just use that card for 5% categories which for me is mostly gas stations.
We charged one guy $3,500 to do his tax returns last year. He paid by credit card.
We got charged $398 by the bank, because he paid with his “VISA rewards” credit card.
Yes–you read that right. We charged $3,500, and netted $3,102 because we had to pay for his rewards.
^ I’ve heard that they charge different fees based on the different types of cards, but I wouldn’t have expected transaction costs that high. Based on what I’ve seen, CC fees are generally in the 2-4% range.
Thats like paypal level fees.
Not sure about Greenie’s case, but my homeboy who works in a family meat market (no homo) where I source my fresh ribs, beef, pork, steak, etc said that amex charges a rediculous 6% fee. After hearing the type of squeeze on the small family business, I’ve began paying cash to help him out. He’s a lot more generous with me now due to that.
And I still don’t believe it greenie, nearly 10% fee? That’s blasphemy!
I find a 10% credit card fee very difficult to believe.
^'Tis true. I didn’t believe it myself, until I saw the actual detail from the bank.
And when I’m going to the small family business, I’ll usually pay with cash. Especially if I know the owner.
If I’m going to the big corporate store, then I try to accrue those “cash back rewards” to myself. I figure they’ve probably already priced in the credit card fees. If I’m going to pay for it anyway, I might as well use it.
^ yeah, fk big corporate. Anyone following the price fixing accusation of MC/Visa?
And I still don’t believe in paying to use a credit card. I’ve juiced the system by getting the United/American/Delta/Hilton/Marriott Rewards cards for the upfront bonus points/miles but then cancel prior to the fee kicking in. Most points have a valuation of .01 and given you have a limited scope to ‘spend’ the points, I don’t find it useful. Also, points/miles can be devalued as some angry customers have discovered.
Are you saying that your merchant fee is not constant across all VISA cards?
Well some of us travel for work and stuff. Changes the equation.
I’m pretty sure they are not
I mean that’s fine to have that view point that “i’m not going to pay to use a credit card” but I believe there are cards out there that are worth the fees depending on your usage. I’ve heard that getting and cancelling cards repeatedly hurts your credit score, but I’ve never cancelled a credit card so I don’t really have first hand experience.