How can banks afford to offer credit card rewards?
There are 3 entities in a credit card transaction; Typically when you swipe for 100, the merchant only gets around 97.5. The 2.5 is divided amongst the 3 entities, roughly around 0.5 for the Merchant Bank, around 0.5 for the Card Network and a lions share to Issuing Bank of around 1.5 The reason Issuing Bank gets large share is because they take the risk and provide the credit to customer. Typically the Issuing Bank would pay the Merchant bank via the Card Network the money in couple of days. So the Merchant Bank is not out of funds. The Issuing Bank on the other hand would have given you a credit of say 10 to 50 days depending on when you made the transaction and when the payment is due. On an average 30 days of credit. So roughly the Acquiring Bank is lending money at the rate of 18%. It is from this money the Issuing Bank would give out rewards, which is typically less than 1%. Also in cases where say Merchant Bank and the Issuing Bank are same, Bank would make money on both the legs of transaction and hence launch co-branded cards with better rewards. The above numbers are illustrative and actual practices vary from Bank to Bank to card Network to Country Related question at How do credit card companies make profit? One reason why some merchants in the US don't accept Discover is that the fee the store is charged is higher than the average. Generally a portion of transaction fee for the network and the issuing bank goes to the rewards program. In some cases a portion of the interest can also be used to fund these programs. Some cards will give you more points when you carry a balance from one month to the next. Therefore encouraging consumers to have interest charges. This portion of the program will be funded from the interest charges. Profits: Rewards: Some rewards are almost always redeemed: cash once the amount of charges gets above a minimum threshold. Some are almost never redeemed: miles with high requirements and tough blackout periods.  Credit cards that don't understand how their customers will use their cards can run into problems. If they offer a great rewards program that encourages use, but pays too high a percentage of points earned can lead to problems. This is especially true when a great percentage of users pay in full each month. This hurt Citibank in the 1990's. They had a card with no annual fee forever, and a very high percentage never had to pay interest. People flocked to the card, and kept it as an emergency card, because they knew it would never have a annual fee. The banks don't have to pay for credit card rewards. The merchants end up footing the bill. The merchants that accept credit cards pay from 2-4% in fees on the credit card purchase. Those fees go to support the rewards programs. The merchants also take on most of the risk during a credit card transaction (although the credit card companies would have you believe otherwise).  If a thief uses a stolen card to purchase a camera from Mike's Camera Shop for instance, any funds the merchant received will be taken away from the merchant. In addition, the merchant will be hit with a chargeback fee (usually around $20-$60). Finally, since the card was stolen, the merchant will never get their merchandise returned, so Mike's Camera is out the camera as well. No camera, no funds, and a $60 fee to boot. The credit card issuers make $60 on the chargeback fees and have no liability. Michael Pryor's answer is accurate to the actual question asked. The current accepted answer from Dheer is not entirely true but roughly provides an overview of the different entities involved in a typical transaction, with some wrong terminologies, corrected and improved below.  The issuing bank, the one that issues the credit card to the customer. When it comes to the service fee split, the issuer bank takes on the majority of the cut in the service fee paid by the merchant to the different entities. For example, on a 2.5% overall fee paid by merchant, roughly 1.5% goes to the issuer, 0.3% goes to the card network (visa, master card, etc) and the remaining 0.7% goes to the acquiring bank. Reward programs have a partnership with participating merchants, where merchants are charged a higher service fee, for the likelihood of driving a higher volume of transactions to the merchant. A portion of the rewards also comes from the issuer, who shares a percentage of their fee back to the customer, in exchange for the same likelihood of making more profit through increased volume in total transactions. For example, a reward program may charge merchants 4.5% fee, with 3.5% of it going to the issuer. Upto 3% of this can be given back to the customer for their loyalty in using the card service. The banks can afford to take as little as 0.5% instead of their regular 1.5% due to the increased volume of transactions and the fixed fee they collect as membership fee. Note that costco has a similar business plan, but they make money entirely of membership fee. So with enough clients, banks can theoretically afford to run their program entirely on membership fees, costing no additional service fee to merchants. The service fee depicted above is arbitrary, and it can be lowered if the merchant is also a client of the issuing bank, that is, both the issuing bank and acquiring bank are the same. So it is kind of a win-win-win situation. And as usual, the banks can afford to make a larger income, if the customer ends up paying interest for their credit - although the rewards program is not designed accounting on this.
Interchange fees. Every time a customer buys something on credit, the seller pays a fee. They're not allowed to itemize that fee and pass it on to the buyer, but they can offer a cash payment discount.  In short, rewards cards are a system of collective bargaining for buyers versus sellers. Some argue it drives prices up for everyone who isn't a cardholder, but I think the evidence is mixed. While you're asking about a particular bank, I'll give my opinion of this in general.  I think a $12,000 household income is pretty low to be given credit. The risk to the bank is certainly higher than if the income were at that $35,000 level. They can use this to differentiate what they offer for perks, and if they ever collateralize the debt of these cards, it's a clearly defined demographic. Here's one reason that's being overlooked in answers so far. (@ChrisInEdmonton, this is for your comment on @Chad's answer.) How do credit card companies make money? Sure, there's interest charges, but those are offset significantly by the cost of borrowing money, and by people defaulting on their debt / entering bankruptcy. The other way they make money is by processing transactions. They get a cut of whatever you buy. If you're a high-income person, and you're going to process a lot of expenditures with this credit card, your business is worth more. They will be willing to bribe you with things like cash-back, frequent flier miles, and insurance on your auto rentals, so that they can be your #1 go-to card.  (This works in concert with the way that some credit card vendors with richer clientele overall - American Express - get to charge higher merchant fees for access to these customers' wallets. But that was mentioned in other answers.) If you're not a high-income person, your business is worth less. If you go somewhere asking for credit, they're going to try and give you a card which will earn them the most money - which probably isn't the one where they give you back 50% of their transaction fee in rewards. It's a calculated risk, since they still have to compete against cash, debit cards, and all the other credit card companies, so they don't have you totally over a barrel, but you shouldn't expect as many freebies, either. Trick question dude. Can't be done. Sorry to tell you. I've been hit with this. Credit card companies do not make money on these customers. Why does Amex have an annual fee on all cards and an abnormally large transaction fee for merchants? Because they don't allow you to carry a balance (On traditional cards). Meaning they don't make money on interest, like the customers in question here. "The bottom line is that you are kind of a terrible customer for them.   Granted you are far better than one that does not pay his bills, but you are (probably) in the tier right above that. Rewards cards are used to lure the unorganized into out of control interest rates and late payments.  These people are Capital One's, and others, best customers.  They have traded hundreds of dollars in interest payments for a couple of dollars in rewards.  The CC company says:  ""YUMMY""! You, on the other hand, cut into their ""meager"" profits from fees collected from your transactions.  Why should they help you make more money?  Why should they further cut into your profits? Response to comment: Given your comment I think the bottom line is a matter of perspective.  You seem like a logical, altruistic type person who probably seeks a win-win situation in business dealings.  This differs from CC companies they operate to seek one thing:  enslavement. BTW the ""terrible customer"" remark should be taken as a compliment.   After you get past the marketing lies you begin to see what reward programs and zero percent financing is all about.  How do most people end up with 21%+ interest rates?  They started with a zero percent balance loan, and was late for a payment. Reward cards work a bit differently.  Studies show that people tend to spend about 17% more when they use a reward card.  I've caught myself ordering an extra appetizer or beer and have subsequently stopped using a reward card for things I can make a decision at the time of purchase.  For people with tight budgets this leads to debt. My ""meager"" profits paragraph makes sense when you understand the onerous nature of CC companies.  They are not interested in earning 2% on purchases (charge 3% and give back 1%) for basically free money.  You rightly see this as what should be a win-win for all parties involved.  Thus the meager in quotation marks.  CC companies are willing to give back 1% and charge 3% if you then pay 15% or more on your balance. Some may disagree with me on the extracting nature of CC companies, but they are wrong.  I like him as an actor, but I don't believe Samuel Jackson's lines." Not for normal banking. You can open as many accounts as you want. I did this recently with some Amazon gift card churning for a Chase cash bonus.      Staying a long time may have their credit department reach out and offer you a long time customer discount. But no one is saying you have to close one account to open another. "Whether or not the specific card in question is truly 0% interest rate for the first 12 months, such cards do exist. However, the bank does make money out of it on the average: Still, 12 months of not having to think about paying the bill. Nice. This is exactly what they want you to do. Then in 12 months, when you start thinking about it, you may find out that you don't have the cash immediately available and end up paying the (usually very large) interest. It is possible to game this system to keep the ""free"" money in investments for the 12 months, as long as you are very careful to always follow the terms and dates. Because even one mishap can take away the small profits you could get for a 12 month investment of a few thousand dollars, it is rarely worth the effort." Much money is made by creditors on the transaction value of a client in addition to interest value.  Knowing that, I pay off all my cards every month, have never made a late payment, and get a number of offers every year for reward type cards. Don't ever be worried about paying off your card in full, just be sure you're using your card and that you pay on time, every time. "Banks are in it to make money. But they're expected to provide a social good which powers our economy: secure money storage (bank accounts) and cashless transactions (credit/debit cards).  And the government does not subsidize this.  In fact, banks are being squeezed. Prudent customers dislike paying the proper cost of their account's maintenance (say, a $50/year fee for a credit card, or $9/month for a checking account) - they want it free.  Meanwhile government is pretty aggressive about preventing ""fine print"" trickery that would let them recover costs other ways.  However there isn't much sympathy for consumers who make trivial mistakes - whether they be technical (overdraft, late fee) or money-management mistakes (like doing balance transfers or getting fooled by promotional interest rates).  So that's where banks are able to make their money: when people are imprudent.  The upshot is that it's hard for a bank to make money on a prudent careful customer; those end up getting ""subsidized"" by the less-careful customers who pay fees and buy high-margin products like balance transfers.  And this has created a perverse incentive: banks make more money when they actively encourage customers to be imprudent.  Here, the 0% interest is to make you cocky about running up a balance, or doing balance transfers at a barely-mentioned fee of 3-5%. They know most Americans don't have $500 in the bank and you won't be able to promptly pay it off right before the 0% rate ends.  (or you'll forget).  And this works - that's why they do it.   By law, you already get 0% interest on purchases when you pay the card in full every month.  So if that's your goal, you already have it.  In theory, the banks collect about 1.5% from every transaction you do, and certainly in your mind's eye, you'd think that would be enough to get by without charging interest.  That doesn't work, though.  The problem is, such a no-interest card would attract people who carry large balances.  That would have two negative impacts: First the bank would have to spend money reborrowing, and second, the bank would have huge exposure to credit card defaults.   The thing to remember is the banks are not nice guys and are not here to serve  you.  They're here to use you to make money, and they're not beneath encouraging you to do things that are actually bad for you. Caveat Emptor." Some accounts, such as my electric, and payments to the tax collector charge a significant enough fee that is counter productive to use a rewards card.  One example of this is Alligent Air.  They give you a $6 discount if you pay with a debit card which was about 5% of the ticket price. Anytime you borrow money, even as well intentioned and thought out as you plan to do so, you are increasing risk.  By managing it carefully you can certainly mitigate it.  The question becomes, does that time spent in management worth the $600/year? I did the costco amex deal for about 12 years earning about $300-$400 per year and only once getting hit with a late/finance charge.  Despite the success, I opted to end this for a few different reasons.  First off people using credit tend to spend more.  Secondly, I felt it was not worth my time in management.  Thirdly, I did not want the risk. Despite the boasts of many, the reality is that few people actually pay off their card each month.  By your post, it seems to me that you will be one of the rare few.  However, if you are expending 5K per month, your income must be above the US national average.  Is $600 really worth it? Perhaps budgeting for Christmas would be a better option. Every reward program has to have a funding source. If the card gives you x percent back on all purchases. That means that their business is structured to entice you to pump more transactions through the system. Either their other costs are lower, or the increased business allows them to make more money off of late fees, and interest. If the card has you earn extra points for buying a type of item or from a type of store (home stores improvement in the Spring), they are trying to make sure you use their card for what can be a significant amount of business during a small window of time. Sometimes they cap it by saying 5% cash back at home improvement stores during the spring but only on the first $1500 of purchases. That limits it to $75 maximum. Adding more business for them, makes more money for them. Groceries and gas are a good year round purchase categories. Yes there is some variation depending on the season, and the weather, but overall there is not an annual cliff once the season ends. Gas and groceries account for thousands of dollars a year these are not insignificant categories, for many families are recession proof. If they perceive a value from this type of offer they will change their buying behavior.  My local grocery store has a deal with a specific gas station. This means that they made a monetary deal. Because you earn points at the grocery store and spend points at the gas station, the grocery store is paying some compensation to the gas station every time you use points. The gas station must be seeing an increase in business so theoretically they don't get 100% compensation from the grocery store.  In cases where credit cards give airline miles, the credit card company buys the miles from the airline at a discount because they know that a significant number of miles will never be used. Cash back from credit cards is handled separately than the rest of the purchase, i.e. interest begins accumulating on that day, and likely at a higher rate, and usually comes out of a lower limit than the credit allotted to that card. Given all these differences, and the obvious revenue-generation situation for the lender, it makes sense for them to give the store an incentive, rather than penalize them further, for the use of such a feature.  Note: I am not privy to the inner-workings or agreements between large stores and credit lenders, so I cannot guarantee any of this. Set up a meeting with the bank that handles your business checking account. Go there in person and bring your business statements: profit and loss, balance sheet, and a spreadsheet showing your historical cash flow. The goal is to get your banker to understand your business and your needs and also for you to be on a first-name basis with your banker for an ongoing business relationship. Tell them you want to establish credit and you want a credit card account with $x as the limit. Your banker might be able to help push your application through even with your credit history. Even if you can't get the limit you want, you'll be on your way and can meet again with your banker in 6 or 12 months. Once your credit is re-established you'll be able to shop around and apply for other rewards cards. One day you might want a line of credit or a business loan. Establishing a relationship with your banker ahead of time will make that process easier if and when the time comes. Continue to meet with him or her at least annually, and bring updated financial statements each time. If nothing else, this process will help you analyze your business, so the process itself is useful even if nothing comes of it immediately. Some large merchants do not give discounts for cash payments as this does not work out any cheaper for them, vs Credit Card payments. In Credit Card typically fees given to all the 3 parties (Merchant bank, Issuer Bank and Visa) would be around 3%. If cash payment is made, and the amounts are large (say at Walmart / K-Mart they have to deposit such cash at Banks, Have a provision to Storing Cash at Stores, People to count the cash. So essentially they will have to pay for Cash Officer to count,  Bigger Safe to store, Transport & Security & Insurance to take Cash to Bank Plus Banks charge around 1% charge for counting the large cash being deposited. This cash would be in local branch where as the operations are centralized and Walmart/K-Mart would need the money in central account, it takes time to get it transferred to a central account, and there is a fee charged by Bank to do this automatically. On the other hand, smaller merchants would like cash as they are operated stand-alone and most of their purchases are also cash. Hence they would tend to give a discount for cash payment if any. Currency exchange is rather the norm than the exception in international wire transfers, so the fact that the amount needs to be exchanged should have no impact at all. The processing time depends on the number of participating banks and their speeds. Typically, between Europe and the US, one or two business days are the norm. Sending from Other countries might involve more steps (banks)  which each takes a bit of time. However, anything beyond 5 business days is not normal. Consider if there are external delays - how did you initiate the sending? Was it in person with an agent of the bank, who might have put it on a stack, and they type it in only a day later (or worse)? Or was it online, so it is in the system right away? On the receiver side, how did you/your friend check? Could there be a delay by waiting for an account statement? Finally, and that is the most common reason, were all the numbers, names, and codes absolutely correct? Even a small mismatch in name spelling might trigger the receiving bank to not allocate the money into the account. Either way, if you contact the sender bank, you will be able to make them follow up on it. They must be able to trace where they money went, and where it currently is. If it is stuck, they will be able to get it ‘unstuck’.