Cash Back Credit Cards: What’s in it for Credit Companies?

Every company seeks ways to increase its profits and lower costs. It makes many wonder why Credit Card companies offer cash back. How can they make money if they give a percentage back to the cardholders? Look at the offers that you get in the mail. They are all advertising different offers and rates. So, what’s in it for the Credit Card companies? We don’t expect they would pay back their customers to keep them loyal to using their credit cards. Credit Cards are not something that individuals would go without. Everyone will choose one, so why not find one that gives you something? That is what the marketing department of these companies is trying to do. They are luring you in to apply for their credit card over the competitors. Like all businesses, there must be something in it for them. 

Merchants Pay

Simply put, the cash back is not coming out of the Credit Card company’s pocket. It is coming from the stores you purchased items from. When you use a credit card, the merchant has to pay a fee to the Credit Card Company. They take that fee, and part of it is what is sent as cash back. The cash back offer does not cost the Credit Card Company any money. It is cutting into their profits slightly. They would typically get the total amount sent by the businesses. In the long run, they are hoping the cash back will make you want to spend more. Increasing the number of fees they get to collect. This is one reason you will see that some stores will charge you a fee to use a credit card. They don’t get the full amount that you paid them. It is their way of getting the total amount. 

Limits 

It is all in the fine print. Before signing up for a card and making your first purchase read through everything. On some cards, the cash back is only for certain assets. This means you will only get the cash back if it is an item that qualifies. Other cards cap the amount you can get in cash back during a given year. Once you hit that limit, the cash back will stop until the following year. The rest of the purchases will be regular and not benefit you. Other cards have different percentages of money back depending on where you spend. These are the most confusing as it changes with the purchase. For example, some cards would give more cash back for purchasing gas over a grocery store charge. With these limitations not advertised, cards can will used more. Customers thinking they will get more cash back, when they won’t. The Credit Card Companies will make more this way instead of losing funds. 

Interest 

Credit Card Companies make a good portion of their profits in interest when the balance rolls over from month to month. The card’s interest rate is always more than the cash back offer. And often are higher rates than other credit cards. Part of the offer is hoping it will entice cardholders to spend more. Making them feel as if they are getting a deal by using their credit card. When you get money back, it must be a deal, right? In reality, you are spending more if you do not have the funds to pay off your card each month. They are making more off those that end up doing this. And the few cash back percentages do not outweigh the higher interest rate you pay each month on the balance left. Those who take the bait and spend more on their credit card are making the Credit Card companies more money. 

Conclusion 

When the offer is too good to be true, believe it is. The Credit Card Companies make it seem like they are being generous and paying back some of their proceeds. The truth is the cash back offer benefits them more. With the restrictions, they can have much control over what and how much cash back each cardholder will get. They also pay none of the cash back as it is mostly taken from the merchants’ fees. And they are still making money on the high interest they get from the balances left each month. 

The cash back offers do not hurt the Credit Card companies in the least. On the contrary, it helps line their pockets more.