Who Pays For the Perks On Your Rewards Credit Card?

On this site, you will find many hacks and guides to making the most of points rewards credit cards and how to ensure you apply for the best credit card reward program for your lifestyle and spending. There are plenty of ways you can use a credit reward program to make the most of your spending and enjoy discounts and benefits on your future purchases.

What Are Rewards Credit Cards?

Before we delve into detail, we need to answer the question "What are Rewards Credit Cards?" Well, these types of credit cards offer their users rewards in discounts, air mile points, and partner benefits. You can collect rewards points on everyday purchases and then apply these to travel, hotel, and other partner purchases.

Depending on the card, you may be able to enjoy perks such as:

• No foreign transaction fees.
• Free baggage check at airports.
• Complimentary membership to airport lounges.
• 10x reward points on travel spending using the card.
• Discounts on Global Entry and TSA Precheck Memberships.
• Increased points on your purchases in different spending categories.

For an annual fee, you should be able to enjoy points rewards on credit cards which end up saving you money on programs and schemes which could cost you hundreds of dollars.

But have you ever wondered exactly how banks and financial organizations can afford to offer you all those benefits and points to redeem for travel, hotels, and rental cars?

Below we will talk you through the truth about who pays for your rewards credit cards and how other cardholders may end up paying for your benefits and perks.

How Do Providers Pay For a Credit Card Reward Program?

If you have a benefits or points rewards credit card, you may have a vague notion that all of your discounts and bonuses are covered by your annual fee and discounts through partner deals. And this is partly true - which is why you will often find that the more expensive rewards are associated with a pricy annual fee.

But banks also generate money from other sources to ensure that their profit margin on a credit card reward program remains healthy. Businesses and consumers are often sources of funds that help to cover the cost incurred when you redeem your rewards.

Each time you use a credit card to buy something at your local store, the card provider charges the business owner a fee for the transaction. These fees may appear inconsequential at first, but with the hundreds of transactions throughout the week - this fee quickly builds up. And banks can then use this income to cover the costs of their credit card reward program.

To make up for this extra fee, businesses will raise prices across the board, so that your fellow consumers are in effect subsidizing the provider's points rewards credit card scheme - whether they pay cash or credit.

How Large Are The Transaction Fees When You Pay By Credit Card?

When you pay with a card from American Express, Citi, Mastercard, or Chase they add on a small, fixed fee to the business owner to process the transaction as well as an interchange fee which is used to cover the costs of handling, payment approval, fraud, and bad debt.

Depending on the card, this fixed fee varies between one and five percent of the total amount you are paying. This soon builds up to profits for banks which can total billions of dollars a year!

Small businesses can end up paying hundreds of dollars a day in interchange fees, but with cash purchasing becoming fewer and fewer, turning down card payments is not a viable option.

The banks then take these profits from interchange fees and use some of them to help cover the costs of rewards and benefits for their points rewards credit card schemes. According to MagnifyMoney, credit card companies and banks spent a staggering $22.6 billion dollars on their rewards schemes in 2017. And given the very increasing competition and array of benefits the best credit card rewards programs offer - it's safe to assume that this amount has increased even more so in recent years.

Lower Income Purchasers Are Paying More to Cover the Rewards of Higher Income Credit Card Consumers

And as the cost of offering a successful credit card rewards program continues to increase, banks look to increasing interchange fees to protect their overall profit margins. This can result in lower-income consumers who generally pay cash or debit having to pay increased costs to cover the fees involved when higher-income buyers use their credit cards to buy products in the same store.

Businesses tend to raise prices across the board which results in non-credit card users contributing towards covering credit card user fees. But there are some alternative systems that companies could put in place to make this a little fairer.

These include adding a surcharge on credit card purchases or else offering a discount to those who pay in cash. But many store owners may be wary of putting off credit card customers who make up a large share of the overall buying population (according to CNBC, the average American has 4 credit cards.)

Summary: The Truth Behind Who Pays For Your Rewards Credit Card

When it comes to your credit card reward program, it is easy to assume that when you pay an annual fee each calendar year, you are paying to cover your share of the benefits and discounts provided. But the truth is a little more complicated!

A points rewards credit card is often subsidized by other areas of credit card provider business including interchange fees on everyday card transactions. These seem nominal when isolated but build up to billions of dollars in income each year for card providers, and it is this income stream that banks use to cover the benefits of the best credit card rewards programs.

Annual fees, late payment charges, and APR charges can also contribute to paying towards your credit reward program and ensure that credit card companies can afford to offer benefits to attract your custom in the future.