Ever wonder why or how credit cards work so many great rewards programs into their marketing strategy? Did you think they offer these great benefits as a way to say thank you to their loyal customers? This is probably what they want you to think. Realistically though, major credit card companies exist to make a profit. You would think that giving rewards to their users would cut into their profits, right? So why do they do it? What do major credit card companies have to gain by giving away rewards? The answer lies within the basic fundamentals of how credit cards work. By knowing and understanding exactly how they work, you too could be taking advantage of some of the sweet rewards programs that are offered.
How Credit Cards Work
Here is the quick nutshell version of how credit cards work and why they are able to offer such sweet rewards programs.
- New customers are enticed by initial sign-up offers like; low interest for a specified number of months, sign-up bonuses, credit card rewards programs
- Some cards even charge annual fees, which people justify paying by weighing their estimated rewards amount over the annual fee amount – they come out ahead, right?
- Credit card companies make money through high-interest rates, fees and miscellaneous charges (transfer fee, cash advance fee, ATM fee, late charge, over limit charge, just cause we feel like it charge because you didn’t read the fine print)
- Credit card companies KNOW, statistically, that the majority of people will use their credit card accounts irresponsibly. This enables them to pay rewards to responsible users and still remain highly profitable.
- Responsible users will tell their friends, family, acquaintances or blog readers about the sweet rewards they get with their card. Some of them will switch to this card for that reason.
- Some of those who switch will be irresponsible and end up being that “statistic” who pays for other peoples rewards
Reaping the Rewards for Responsible Credit Card Usage
Here is a story I found on a blog called My Money Design. It is from just before Christmas in 2011, and this blogger was actually able to do much of his Christmas gift shopping by using his credit card rewards programs.
Credit card rewards programs are my single best source for Christmas purchases. What I like to do is save up my cash back and bonus points all year-round and start cashing them in around October.
What’s the best bang for your buck? Redeem them for gift cards. There are a lot of reasons I like gift cards, but mainly:
• You can usually redeem gift cards for less than their face value. For example, Discover Card will often let you get a $25 gift card for $20. In other words, you can redeem more gift cards than you would physical cash back.
• Giving gift cards accomplishes two goals. They allow you to give a gift while at the same time allow the receiver to go on a shopping spree and buy exactly what they want.
This year alone, I have so far redeemed almost $400 dollars worth of gift cards for my family and friends (and I’m not done yet).
Similar to rewards cards, I use MyPoints to accumulate just about enough points to redeem around $50 in gift cards. The beauty here is that I spent almost NOTHING to get there except click a bunch of ads in emails.
The airline miles programs usually have the worst return rate (in my opinion) for anything other than a plane ticket somewhere. But that doesn’t mean they should go overlooked or unused. Depending on how many miles you have, they could be redeemed for some items like small electronics, gift cards, and other stocking stuffers. My favorite:
• Magazine subscriptions.
Yes, for a few thousand miles, you can usually redeem them for a popular magazine subscription. Now you’re giving a gift that gives all year along!
This was just a portion of the post, Buying Christmas Presents For Free Using My Rewards Programs, on My Money Design. Please click through if you wish to read the introductory story and also gain some helpful advice at the end.
Thanking Irresponsible Credit Card Users
Another blogger who is seemingly in the minority of actual responsible credit card users had a unique idea. He decided to express his special appreciation to all of the irresponsible credit card holders by dedicating an entire blog post to them. Here is part of Jeremy’s post on his blog, Modest Money.
…I want to personally thank the countless people who are irresponsible with their credit card usage.
Without the huge profits that these people are generating for credit card issuers, we would all be paying annual fees and higher interest rates. [Credit card rewards] would be virtually nonexistent. So from the bottom of my heart wallet, thank you!
Charging What You Cannot Afford
Amazingly many people treat their credit cards as an extended bank account. No money in the bank for those new shoes or dinner out with friends? No problem! Just charge it to your credit card!
Before you know it, you have a credit card balance that you cannot pay off. With the high interest rates of credit cards, this can be disastrous.
Always Making The Minimum Payment
For some reason people seem to think that paying the minimum payment on a credit card is perfectly fine. Somehow they are able to ignore how much interest they will have to pay by only making the minimum payment.
The minimum payment isn’t designed to help you pay off your credit card balance though. It is set so low to encourage people to maintain a balance owed. The longer you take to pay off that balance, the more interest you are paying. You are essentially willingly paying a higher and higher price for whatever you charged to your credit card.
Making Late Payments
This is the irresponsible move that can really hurt you. Most credit card issuers will ding you with a hefty late payment fee. Just by putting off that payment, you could be forced to pay a fee that is even higher than the monthly interest.
Getting Cash Advances
Some people may have thought they discovered a convenient feature of credit cards – the ability to get cash advances. This is just another trap setup by the card issuers though.
For this convenience, they usually charge a cash advance fee. Then on top of this, they charge a much higher interest on this debt. There is almost always a better option than taking a cash loan out on your credit card.
These were only snippets from Jeremy’s post, Thank You For Irresponsible Credit Card Usage, on Modest Money. Please click through if you wish to read the post in its entirety.
Readers: Are you in the minority of responsible credit card users, or are you one of the statistical majority that funds rewards programs for them? I would love to hear about rewards programs that you are able to take advantage of… or ways that credit card companies were able to take advantage of you!
I hope this post has been a helpful Pay Off Credit Card resource for you in your quest to eliminate that stupid credit card debt. Feel free to join in on the discussion in the comments section below or head on over to our Discussion Forum. The best way to stay up to date with recent posts on this blog is to have them delivered straight to your e-mail inbox (Subscribe Here) or Subscribe by RSS.