Are Credit Card Rewards Actually Free?
This guide explains who actually funds credit card rewards and how to make sure you are on the winning side of the system.
Where rewards money comes from
Every card purchase generates a swipe fee, or interchange, that the merchant pays, and those fees are largely built into the prices everyone pays, whether they use a card or not. On top of that, the interest paid by people who carry balances funds a large share of rewards. So rewards are not conjured from nothing; they are recycled from fees and interest that flow through the whole system.
Who wins and who loses
This is the crucial part. If you pay your statement in full every month, you never pay interest, so you collect rewards funded by the system without contributing interest to it, you come out ahead. If you carry a balance, the interest you pay dwarfs any rewards, and you become one of the people funding everyone else’s rewards, as spelled out in do rewards beat the interest.
How to be on the winning side
The takeaway is simple and is the heart of using cards well: treat rewards as a rebate you earn only by paying in full and never revolving a balance. Do that, and rewards are as close to free as it gets for you personally. This is the same idea behind why American cards reward you so heavily, learn the game, and you get paid instead of paying.
- Rewards are funded by merchant swipe fees and cardholder interest.
- Swipe fees are baked into higher prices for everyone.
- Interest from revolvers funds much of the rest.
- Paying in full lets you capture rewards without funding them.
- Carrying a balance means you pay for the rewards.
Frequently asked questions
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