Who Pays for Credit Card Rewards?

Who Pays for Credit Card Rewards?

As much as consumers love their reward credit cards, many merchants hate them. And maybe we should, too.

Why? Because whenever you swipe a credit card, merchants get dinged for a 1-3% interchange fee. And guess what? Those interchange fees go, in part, toward your credit cards rewards.

In other words, credit card rewards contribute to the costs associated with card processing. And because merchants can’t typically add a credit card surcharge, many charge higher prices than would otherwise be necessary.

Yes, merchants can mitigate these expenses by refusing credit cards entirely, or by choosing which cards they’ll accept. Indeed, the fact that American Express isn’t as widely accepted as other card types is primarily due to their higher costs.

And yes, merchants can still offer a cash discount — and some do — but the lion’s share simply pass the costs along to consumers in general.

Interestingly, according to Trish Wexler of the Electronic Payments Coalition, who was quoted in a recent CardRatings.com article, one of the most common places to see a cash discount is at a gas station. The reason for this is that paying in cash requires you to go inside, where you’re more likely to make impulse purchases.

As for me, I have mixed feelings on the subject. We never carry a balance, and we certainly do like earning “free” rewards. But at the same time, these rewards are embedded in the cost of the items that we buy.

Since credit cards (and the associated charges) aren’t going away anytime soon, however, it seems like your best bet is to find the most generous card that you can and use it to recover at least a piece of what’s being lost to those pesky interchange fees.

Via: CardRatings.com

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17 Responses to “Who Pays for Credit Card Rewards?”

  1. Anonymous

    Hi, i feel that i saw you visited my blog so i came to return the choose?.I am trying to find
    things to improve my website!I guess its ok
    to use a few of your ideas!!

  2. Anonymous

    People who pay with cash subsidize rewards. Merchants don’t segment out cash payers unless specifically advertised like big ticket or gas stations. Most of the time, price is the same cash or credit. So, the people that pay with cash increase the retailer’s profit margin which benefit the credit card payers. Without cash payers, the average item cost would slightly go up.

  3. Anonymous

    I’m a big user of rewards cards and sign-up bonuses, but as a former merchant, the way the system works is ridiculous. As a merchant, you get billed varying amounts for different types of cards, but you have absolutely no control over it. For example, you’ll see a special line item for “Visa Signature” that has a higher fee than a regular Visa card. When Visa runs all those ads for premier concert tickets or whatever that you get as a Signature card member, you know where the money for those perks come from. The customer has no direct say over it and the merchant has no control over it. It’s insidious.

  4. Anonymous

    The only places I’ve seen cash discounts are at gas stations. Since no one else really provides a discount for cash use, I’m going to continue using my rewards credit cards to make my purchases. Like everyone else already mentioned; you might as well capitalize on it.

  5. Anonymous

    There’s a cost to handling cash too. For big businesses, I wonder how much it costs to have an armored car pick up cash everyday? For small businesses, someone has to deposit the checks and cash. Getting cash has its costs too … waiting in line at the bank, ATM fees, etc. It’s all a wash …

  6. Anonymous

    Devin is the most correct. The debit interchange fee legislation was something that was sold partially on the idea that it would benefit consumers too. This benefit was championed by the chamber of commerce, who was actually just lobbying for businesses.

    Rewards cards typically have higher interest rates than non-rewards credit cards. This is another area where rewards are paid for.

  7. Anonymous

    Joe, I couldn’t agree more. I don’t care who pays for it, I don’t use the cards for the rewards. I use them for the sign-up bonuses! In the past year, I have signed up for an AMEX, 3 Citi Cards and a Chase Card. From that, I’ve gotten $1500 cash, $2800 in airline flights, $500 in cash, and $625 in amazon gift cards!

    And to top it off, my credit score has gone up in that time!

  8. Anonymous

    I really don’t care. And here is why. Last year I made over $7000.00 from credit card rewards between me my wife and our two businesses. Those of you who use credit cards for rewards and don’t flip the cards from one to the next to cash in on the bonus points don’t know what you’re missing.

  9. Anonymous

    I had read an article where people spend 12-18% more when they use a credit card as opposed to cash. I think for retailers over-all this turns out to be a great deal for them. I personally use my CC for everything, even for utilities, to get the cash reward, but we never carry a balance.

  10. Anonymous

    I consider CC rewards similar in nature to using coupons or other promotional offerings. I mean nobody is asking who pays for that 25¢ that someone got on their bottle of mustard at the grocery store by using a coupon. Nobody thinks that a bank giving me a free toaster for signing up for an account is coming out of someone elses pocket. CC rebates are effectively the same kind of thing in my eyes. Whether its a coupon, giveaway or CC rewards they are all just a discount for customers who choose to use it.

  11. Anonymous

    I agree, but I’m also not sure what to do about it. Funny, I actually posted today about the same phenomenon with student loans and tuition (i.e. do student loans raise the cost of college for everyone?)

    The problem I see is what a proper solution would be. I think it may fall into the “if enough people do it” category, but getting “enough people” to pay cash is tough… also, it probably wouldn’t lower costs, but may slow inflation of costs, imo.

  12. Anonymous

    Merchants (should) hate rewards cards for only two reasons: 1) They push people to use credit cards that they wouldn’t have otherwise. I suspect this is a relatively small group but do not have data to back up my belief. I would probably use a credit card almost as often without rewards as I do with. 2) The interchange fees are *slightly* higher. Not 1-3% higher. More like, a tenth of a percent higher. Not so much that they should even notice what kind of Visa or Mastercard the person is using.

  13. Anonymous

    I agree, we are moving away from using not only cash but checks, next will be credit cards, but not very soon. I am looking at new mobile phone technology growing in the US so you can pay with your phone, transfer money to friends phones and keep track of your financial life using your mobile devices like the iPad, etc.

    All this convenience cost and guess who pays, yep we do!

  14. Anonymous

    Our society is definitely moving away from cash and more towards credit cards/instant payment methods. Just look to Japan, they are paying for things with their phones, their subway cards are like debit cards that can be used at certain stores in addition to paying for fares.

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