Here's Who Really Pays for Credit Card Rewards

From a consumer’s perspective, credit card rewards are an amazing perk. Earning 2% or more back on your purchases definitely beats earning 0%. Many rewards cards also have welcome offers to sweeten the deal, such as a $200 bonus if you spend $500 in the first three months.

It raises the question: Who really funds these rewards programs? Thanks to a report by the Consumer Financial Protection Bureau (CFPB), we have the answer. If you want to make sure you come out ahead with credit card rewards, it helps to know what goes on behind the scenes.

How credit card issuers fund their rewards programs

Credit card issuers technically pay for the rewards they issue. It’s no small sum, either. They paid out over $40 billion in credit card rewards in 2022, according to the CFPB.

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But they make much more in fees than those rewards cost them. Here’s where the money that pays for those rewards comes from.

Interchange fees paid by the merchants

Every time you pay with a credit card, the merchant pays an interchange fee. The exact amount varies depending on a number of factors, but it’s usually about 1% to 3%, according to research on credit card processing fees by The Motley Fool Ascent.

So, if you make a $100 purchase on your credit card, the merchant pays about $1 to $3 in interchange fees. In 2022, U.S. credit card companies earned $126.4 billion in processing fees charged to merchants.

That’s already enough to cover the cost of credit card rewards three times over. It’s also why some argue that merchants effectively fund rewards programs in the fees they pay. But there’s another sizable source of income for credit card companies.

Interest and other fees paid by cardholders

There are quite a few fees that cardholders can incur when using credit cards. The largest is credit card interest. Others include annual fees, cash advance fees, and balance transfer fees. Credit card issuers charged over $130 billion in interest and other fees in 2022, according to the CFPB.

It’s fair to say that cardholders also help fund credit card rewards programs, since they’re paying so much in fees. But not all cardholders. It’s primarily “revolvers,” a term for cardholders who carry balances on their cards.

Revolvers pay a staggering 94% of the total interest and fees card issuers charge. They only earn 27% of the total credit card rewards. “Transactors,” or those who pay their credit cards in full every month, pay a mere 6% of total interest and fees while earning 73% of the rewards.

Always pay in full with rewards credit cards

If you want to save money by using rewards credit cards, the CFPB data makes it clear what you need to do. Pay your credit card’s entire balance every month. When you do that, you can earn rewards without paying any interest to your card issuer.

The CFPB found that consumers who carry a balance on their rewards cards almost never come out ahead. You’ll still be earning rewards, but you’ll also be getting charged interest. That’s a losing battle because of how high credit card interest rates are. The average is currently 21.59%, according to the Federal Reserve.

If you have credit card debt, give that your full attention until it’s paid off. Rewards cards can be a great financial tool, but only when you’re able to be a transactor and pay your cards off in full.

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