Credit Card Companies WANT me to refer you!!!!
It might seem surprising to you that credit card companies offer points at all. I mean, aren’t they in the business of making money . . . and lots of it? Why would a for profit company give away items of such value – like travel points, huge signing bonuses, and perks – for free? These questions might make you apprehensive to consider points-based travel because you are convinced there must be a catch. Well guess what: there IS a catch . . . several in fact! However, if you arm yourself with some basic knowledge about how credit card companies make money, you can make the “catch” work in your favor. In reality, you see these concepts at work every day, in every industry, and every product. For example, most of you take advantage of coupons, rebates, BOGOs, discounts, markdowns . . . and the free set of steak knives if you are one of the first 10 callers. Credit card companies are able to offer the incredible value of travel points for the same reason other companies are able to offer their perks: those perks are paid for by the ones who do not take advantage of them. It’s a numbers game. Companies know that the majority of consumers don’t take advantage of coupons and rebates, and therefore pay for those who do. Most consumers will settle for paying markup, while only a few will take the time to get informed and pay markdown. And that’s why Credit Card companies WANT me to refer you!
The Credit Card Industry makes their money primarily three ways:
*On interest, when people don’t pay off their credit card;
*Fees, either those charged to the cardholder or those transaction fees charged to businesses who accept credit cards; and
*Selling marketing information about YOU!
The more that you understand about how credit cards work, the better off you will be in the long run.
There are associations that actually issue credit cards, such as Chase, Bank of America, Citicorp, etc… and then there are retail establishments that sell branded credit cards (with their name on them) that are usually contracted with an affiliate bank or larger creditor like the ones listed above.
Then there are networks, such as American Express, Discover, Visa and Mastercard, which control where credit cards are accepted and coordinate the transactions between the card issuer and the merchant. And two of these – Discover and American Express – are both networks AND issuers. The network sets the fees (“interchange”) that are charged to the merchant. These credit card networks DO NOT charge the fees that a cardholder pays though (such as interest fees, late fees, international fees, etc…). These come from the issuer.
Banks, and sometimes credit unions, will work with the networks to issue a card. This issuing bank financially backs the card. We generally just call the issuers “the credit card company.” They are responsible for paying for the transaction, collecting payments, approving or denying card applications, and setting the terms of a particular card. Credit card networks and credit card issuers serve in completely different capacities.
The benefits, the ones that entice you and me, that are tied to a particular card, such as points or status, are determined by the card issuer. Other benefits, including rental insurance or payment protection, are often provided by the network.
THE QUICK WALK-THROUGH
When you swipe your credit card, it moves through several channels before the transaction happens on the other side, although in today’s fast moving and web-based market, you can often see that charge instantly on the website of yourcredit card company. After the card has been swiped at the retail location, it proceeds from the issuer, then moves on through the network, and then to the merchant’s bank, which verifies your charge, and bills that charge to you.
INTEREST
If you don’t pay off your card each month, they charge YOU for the privilege of borrowing THEIR money! However, if you always pay your bill off every single month, you will never be charged interest – not one penny – and will never have to pay a late fee. Paying your credit card bills in full each month is MANDATORY in making points-based vacations feasible!
34% of the entire US population carries a balance on their credit card. And the average household in America has more than $15,000 in credit card debt. The average APR (Annual Percentage Rate) charged by the credit card issuing company is a whopping 16%!! That means, that 34% of American’s are paying $6,000 per year, in interest alone. That’s $500 per month. WHAT!? Don’t be this guy (or gal)!
FEES
Merchants (or Retail Stores) pay a processing fee that is a percentage of the total transaction. This is called “interchange,” and can cost retailers up to 3 or 4% on every transaction, as determined by the networks. They are generally happy to pay it though, as they’ve come to expect consumers to use credit cards. Because of this, they generally factor in this cost, and charge an extra 4% on the goods that are being sold. This is called “markup”.
Other fees that credit card companies earn include cash advance fees, balance transfer fees, over-the-limit fees, late fees and annual fees (for premium credit cards). I never thought I’d get a credit card that charged an annual fee, until I saw how valuable the points were. Now I pay several annual fees, which are far outweighed by the perks and points. If you need a number to help convince you why Credit Card companies want me to refer you, try this one: last year, credit card companies made $104 Billion (with a B) in fees.
MARKETING
The last way that credit card companies make money is by selling your information to advertisers. You are placed into a group of customers based on where you spend the bulk of your money. Did you ever wonder why you receive targeted marketing materials and ads related to purchases you have recently made? It’s because companies you do business with, including credit card companies, sell your purchase history. But take heart, federal law permits you to call your credit card company and request that they NOT sell your information. It is called “opting out” – and I’d highly recommend it!
Let’s Get to the Point
Understanding exactly how credit card companies make money will help you determine whether or not points-based vacations are for you. I’ve stated before, just because some girl on the internet says you should obtain a certain credit card, please practice wise financial stewardship. If you are financially able to pay off a credit card every single month, and you are interested in knowing how my very favorite starter credit card can help you achieve no more pointless travel, then check out this link!