Rewards credit cards are a lot of fun. They make shopping fun. People enjoy using them, and this makes sense, since these credit cards actually reward you for using them. You use them to buy some stuff that you like, and you also get a reward for making that purchase. Not only that, but, if you have a cash back rewards credit card, the credit card company actually pays you for using their card.
At this point, you have to ask yourself if the company is making any profit. You probably already know the answer, but this article will also explain to you why it’s so.
The Devil’s in the details
Of course credit card companies are making a profit with this strategy. They wouldn’t do it otherwise. But to understand how they do it, you have to get a magnifier and go to the fine print.
Most cash back rewards credit cards have an annual maximum limit. They may offer an awesome 5% cash back reward, but that reward is only for a maximum of about $1,500 per year. Meanwhile, other cards offer cash back only if you shop in certain places and only if you purchase certain goods.
However, many people don’t read the fine print. They get a rewards credit card and they use it all over the place, thinking about all the cash that they’ll get back. But that’s not going to happen.
It’s a trap!
Well, maybe it’s not a trap. I just wanted to quote Admiral Ackbar. But it is a trick. Credit card companies play this trick in order to convince you to use your credit card rather than cash.
When you pay for something with a credit card, the merchant who receives the payment is required to pay a percentage of the amount as a fee to the credit card company. If you have a cash back rewards credit card, your card issuer shares some of that fee with you. So the more you use the credit card, the more merchant fees the credit card company earns.
Cash back rewards credit cards are still credit cards
And don’t forget that credit cards also come with late fees and interest rates, which also send money into the pockets of the credit card company. Rewards credit cards charge high interest rates. If you miss just one payment, you will understand the hard way that all that “free” rewards money is actually not free at all.
