Credit card companies thrive on profitability, yet they entice consumers with attractive incentives like cash back on purchases. Amid the deluge of online promotions and mail offers promising lucrative benefits ranging from zero to low initial interest rates to one-time bonus rewards to cash back rewards, consumers are often left wondering how these deals are sustainable.
Nowadays, banks are offering seemingly generous cash back incentives even beyond the introductory period. For instance, Chase and Discover provide up to 5% cash back on select cards. But how do credit card companies manage to provide such appealing deals while remaining profitable?
Cash Rewards Programs: The Fine Print
Most cash rewards programs come with an annual limit despite offering a 5% cash back reward, which may have an annual cap. Some cards limit cash back to specific purchase categories like dining or gas.
Discover’s 5% cash back card, for instance, is subject to purchasing caps per quarter, with exclusions for certain transaction methods like NFC technology. Similarly, the Chase Freedom card imposes spending restrictions and caps, rewarding 5% cash back only on select categories.
Cards with a $1,500 cash back limit at 5% per year imply that spending exceeding $30,000 won’t contribute to additional cash back rewards. Understanding the fine print is crucial as cash back programs may not be as universal as perceived.
It’s Not Free Cash
Merchants paying via credit cards incur transaction fees to the credit card companies, with participating cash back programs enabling cardholders to share a portion of these fees. The objective is to incentivize credit card usage over cash or debit cards, increasing merchant fees earned by the credit card company.
Credit card companies also profit from high interest rates on revolving balances and late payment charges. Increased credit card usage heightens the likelihood of missed payments or carrying balances, leading to fees and interest charges.
Cards offering substantial rewards often carry higher fees and interest rates compared to those without rewards, ultimately enhancing the credit card company’s revenue streams.
The Bottom Line
Cash back rewards appear appealing but come with limitations and qualifications. These programs serve as incentives to boost credit card usage, leading to increased merchant fees and potential debt accumulation for the credit card company.
Cash back credit cards not only drive more significant revenue through merchant fees but also encourage higher spending due to the psychological allure of earning money while making purchases. Contrary to depleting profits, cash back programs significantly bolster credit card companies’ bottom lines.