Who Actually Pays for Your Credit Card Rewards?

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March 8, 2019, By

hoppers and frequent travellers love credit card rewards. If you have a reward credit card, you are eligible to earn cashback, JPMiles, reward points, and other offers depending on the type of card you own. Ever wondered how banks afford to fuel their reward program? We all are aware that there is no such thing as a free lunch. In that case, who actually pays for the rewards you earn?

When a credit card offers 2,000 reward points as joining bonus, some people will think “Woah, 2,000 reward points, I have to sign up right away!”. While others might ask “What’s the catch?”. If you fall under the second group, you have a good reason to suspect the perks.
Credit card companies make profits through the interest rate you pay, the fees and charges such as annual fee, and interchange fees. While many are aware of the interest rate and fees and charges applicable on the card, not many are aware of the interchange fee.

What is a credit card interchange fee?

Whenever you use your credit card to make a payment, the merchant is required to pay a percentage of the transaction amount as an interchange fee to the credit card company. Every year, credit card companies earn billions through the interchange fees paid by merchants. They use a part of this profit to pump their reward program. The goal is to motivate you to use your credit card to make payments instead of using your debit card or cash. The more customers use their credit cards, the more interchange fees the credit card company earns.

The interchange fee is set by the payment networks such as MasterCard and Visa. It differs from card to card as there are several factors that determine the interchange fee. Some of the factors are the brand, the city you live in, the type of card (basic or premium), the merchant, and the type of the transaction (in-store or online).

If you have a basic reward credit card, the interchange fee may range from 1% to 1.5% of the transaction amount. However, if you have a premium reward credit card, the interchange fee may be up to 3% to 3.5% of the transaction amount. Your credit card provider will earn more if you use a premium credit card to make a payment.

As merchants are instructed to honor all cards. Therefore, they cannot decline your card even if they know they will end up paying a high interchange fee. Even if you do not have a reward credit card, you will still end up paying the interchange fee and you will be indirectly funding the bank’s reward program.

Smart ways to maximise your reward points

Credit card companies and merchants across the world are trying their best to make sure they are not losing money when customers use their credit card to make a payment. As a cardholder, you should also think alike. Here are a couple of ways you can make sure you maximise your reward points:

Pick your fees and charges: Reward points will only make sense if you are not paying high fees and charges on your card. The cost of owning a credit card should not be more than the benefits you get owning the card. Avoid paying finance charges and always clear the total outstanding balance. If you pay a high annual fee, make sure it is worth it. Calculate the benefits the card offers and make sure the annual fee or the renewal fee you pay is worth paying.

Choose the place you swipe your card wisely: In order to make up for the interchange fee loss, many merchants have started charging the cardholder a surcharge. In case the interchange fee is 2%, the merchant might charge you 2.5% including the surcharge. Do not swipe your credit card if the merchant is charging a surcharge.

Use your reward points before they expire: Make sure you redeem your reward points or JPMiles before they expire. There is no point owning a reward credit card if you aren’t actually using the rewards.

Switch to a low-interest credit card: If you are unable to clear the total outstanding balance on the card and are also paying a high annual fee, consider getting a low-interest credit card that charges a low annual fee. This way you will save on interest cost and other charges in the long run.

Owning a reward credit card in itself is not the problem, not using it to your benefit is. Educate yourself of the ways you can maximise your reward points and enjoy the privileges the card offers.

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