How Credit Card Rewards Work
If you’ve kept an eye on the news, Kolo recently launched a Visa credit card with 5% Bitcoin cash back. As far as we can see, this is a legitimate offer—so how do these card companies manage to give such amazing kickbacks?
Banks can give kickbacks because of vendor swipe fees, interest rates, and annual fees. Even with all the kickbacks, know that the bank is making far more off of you than you are off of them. Read on to learn more about the dirty truth behind how credit card rewards work.
How Can Banks Give Cash Back for Card Usage?
Swipe Fees
Basically, every time you use your card, the bank makes money. This is thanks to swipe fees covered by the vendor—typically between 1% and 3% of the total value of the sale, depending on the company the vendor uses to process sales.
Although this may not sound like much, this is a huge money maker for banks. So much so that when vendors started imposing credit card minimums or fees for using certain cards, the banks fought back, making it illegal in many countries to require the customer to cover the fee for using the card. While not always illegal, it is often strictly regulated with a clear cap.
Regardless, when you use your card, someone has to pay, and credit card rewards are a way for banks to return some of that cost to customers and incentivize card usage.
Interest Rates
Another way banks are able to fund their rewards programs is when other users of the cards do not pay their full balance every month and are charged interest. Credit cards come with hefty interest rates—often starting somewhere around 15%. Although many users open a card resolving to pay off the balance each month—many don’t make it—often further lining the banks’ pockets.
From what we can tell, because banks can’t guarantee that credit card users won’t pay off their balance, these monies are rarely used toward rewards programs. How the banks divvy up these funds varies, but we assume most go into advertising accounts or bonuses for bank executives. That being said, some of the really big rewards programs likely gain funds from this as well.
Annual Fees
The final way banks are able to fund their credit card reward programs is via annual fees. It’s not a secret that the more you are willing to pay for a credit card, generally the better the rewards program is. The most famous is the American Express Rewards card with a massive $495 yearly fee, though many using the program report it being worth it.
Annual fees are something a bank can rely on for income each and every year, because even though there are always cancellations, there are always people opening new accounts as well. Especially in the case of the American Express Rewards card, the funds collected annually are allocated to some of the nicer rewards, which require regular payments, such as the airport lounges.
Are Credit Card Rewards a Scam?
Surprisingly, no. As mentioned above, credit card rewards are the way your card issuer shares the fees the vendor pays for swiping your card. That being said, prices are higher because of card usage.
What do we mean by that? Well, when a vendor sets prices, they have to assume all of their items will be purchased with a card—which is more common than not these days—and often different cards have different costs. For example, Visa and Mastercard tend to be the cheapest, never charging more than 3% of the price of the sale, but American Express takes a whopping 4% of every sale, and this is why most vendors are against it!
Planning for this all vendors often raise their prices by 4-5% just in case an American Express card holder comes to shop. This is unfair to those who pay cash, who don’t contribute to the fees the vendor pays. Of course, this matters less and less as the years go by, but a few vendors do give discounts when you pay cash because of this (but so few do so you are often paying more by not using a card because you aren’t getting the rewards!)
So, while yes, we are back to game theory, incentivizing everyone to own a credit card, note that credit cards are not good ideas for everyone. If you can’t restrict your spending and aren’t good at paying bills on time, you will pay far more in interest and late fees than you do when you shop with cash and cover the fee for the card you don’t use.
What is the Best Rewards Credit Card?
There is no easy answer to this question, as the best rewards credit card will depend on the rewards you will actually use. Unfortunately, there are many people out there who sign up for rewards credit cards who never end up using the rewards they earn. The main example of this is credit cards tied to a business you don’t use regularly—such as those belonging to cruise lines, specific airlines, and theme parks like Six Flags.
The reality is, you should sign up for a credit card with rewards you will use, meaning a simple cash back card may be the best for you. Think about it—you will always need to use money!
What is the Best Crypto Rewards Card?
Unfortunately, we haven’t had the chance to test cryptocurrency rewards cards enough to say. However, below are some of the reputable crypto rewards cards you may want to look into.
· Nexo Crypto Card
· Venmo Credit Card
Ensure you read all the terms, conditions, and small print before signing up for a credit card, and ensure that doing so won’t put you into a precarious financial situation. Remember, debt rarely outweighs the rewards you’ll gain by swiping your card for crypto rewards.
