How Do Credit Card Companies Make Money on Rewards?
Interchange fees do the heavy lifting
When you pay with a card, the merchant pays an interchange or swipe fee, typically a small percentage of the sale, to the bank that issued your card. That fee is the main engine behind rewards: the issuer hands part of it back to you as points or cash back to keep you spending on its card. The more you spend, the more interchange the issuer collects, so rewarding your spending is good business for them.
Interest and fees add to it
Issuers also profit from the people who carry a balance and pay interest, often around 20 percent APR, and from annual fees on premium cards. Rewards are designed to attract high spenders, some of whom will occasionally carry a balance or pay a fee. This is why paying in full matters so much on your end, as covered in rewards and carrying a balance.
What it means for you
Understanding the model is reassuring: rewards are real, funded by merchants, and yours to keep as long as you pay in full and avoid unnecessary fees. The issuer wins when you spend, and you win when you earn on spending you would do anyway. Use a credit card rewards calculator to make sure you are getting the best share of that interchange back on your spending.
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