[Unoeufisenough]

Actually most (depending on the card, the great majority) of those fees end up going right back to the cardholder. Those fees are what pays for all those airline points, cash-back discounts, guarantees and liability protections, purchase insurance etc.

Another way of thinking about credit cards is a way that a large groups of customers are able to band together to collectively demand discounts, rewards and other valuable protections from merchants in exchange for their business.

The banks compete amongst themselves to win your business as a cardholder by trying to negotiate higher discounts from merchants. (the fees paid by merchants are called MDR or merchant discount rate).

[tibbon]

Very interesting!

Perhaps I'm a minority here, but I actually would more prefer just simple cards that are used for payment than a reward-based card (which is why i have a very basic debit card from a credit union). All the airline points and discounts just strike me as marketing more than a real benefit. US Airlines keeps reminding me of the number of points I've forfeited by not using them enough... as if that will make me want to use them more and still not get free flights.

[majormajor]

I've never been into getting mileage or whatever, but rewards cards can be very handy. I basically get 1% off of everything I buy -- I've got a card through Amex with no annual fee that simply sends me a $25 gift card in the mail every time I spend $2500. It's basically effortless -- all I have to do is pay with two cards every once in a while after getting the gift card and buying something for more than $25.

If there are people willing to give you free money you might as well take it. :)

Amex has also consistently given me absolutely fantastic customer service. I'm really not in any hurry for them to be disrupted...

[ImprovedSilence]

Not to be the debbie downer, as I use rewards cards as well. But there is not such thing as free money. This money you are getting is coming from somewhere. The banks are clearly raking in a$$ loads of cash from the merchant when you use your card. I think it's safe to assume the merchant increases the cost of their goods to offset the fees he pays for transactions. So, the merchant sets his prices 3% higher than he would have to, you pay that extra 3%, get 1% back and think "oh, goodie me, free money", and the merchant breaks even. Sure, you come out 1% above people not using rewards, but it's a net gain of -2%. Credit card companies win.

Like I said, I use rewards cards as well, it's a bit of a tragedy of the commons if you will, everyone just trying to offset their costs for a little, but this just causes the hidden costs to continue to rise.

[majormajor]

This is a very good point, I wasn't entirely clear there. I meant free in the context of someone who's already using a debit (I assume processed-as-credit at most merchants) card, yet missing out on many of the benefits offered by many credit cards.

I disagree about the tragedy of the commons part -- specifically that it's any tragedy. In order to keep the discussion simple I'm not going to go into the potential for abuse (which is a serious problem) and the charge-vs-credit card distinction, but overall I find cards to be enormously beneficial compared to cash: I can buy pricier items without having to travel to the bank to take out cash in advance or mess around with checks (an annoying, less-secure system that rather scares me fraud-wise), I can buy gas without going inside the building, I can buy things online with ease, I can dispute charges in case of fraud or if a merchant trys to pull a fast one or never ships me the item (and I've been able to do this successfully), and I wouldn't really be out any money if someone stole my wallet, I'd just need to make a few phone calls and get some new cards overnighted to me. For free. It's tremendously convenient, and to me, completely worthwhile.

It's amazing how quickly the world can change these days: it's an industry that's about a hundred years old that pretty thoroughly changed the world and has already made it to the "unpopular incumbent" stage.

[ImprovedSilence]

You make good points, I agree with the benefit of cards over cash as well. And who wants to lug around a checkbook when I can just put a small piece of plastic in my wallet? There is definite value in that. Maybe even 3% value. I think CC companies may get the "unpopular incumbent" label because most people are not even aware of how credit cards work, and their costs are often times hidden. I mean hidden in the sense that we don't realize the price increase of goods this convince is costing us. I bet if the apple store started selling mac pros at 3% under retail price for cash, more people would inconvenience themselves to pay in cash. But many people are not properly informed, and therefore do not act as rational players. Many jewelers seem to play in this realm of cutting prices for cash buyers. (I know, there may be other reasons for that, but it's an example of merchants incentiveizing buyers to use cash)

[infinite8s]

Most merchant agreements prohibit offering a discount for cash purchases. Those jewelers who do it are probably betting that they won't get caught and have their CC processing yanked. What this means is that in effect everybody pays slightly higher prices in to cover the fees for accepting credit cards.

[infinite8s]

This is definitely not free money. The problem I have with rewards cards is that they lead to higher prices (since the banks aren't gonna give back any of their fees to pay for the rewards) and therefore merchants have to raise their prices to compensate. So it becomes a bit of an arms race -where people who don't use reward cards end up paying more (since they pay higher prices without the small discount from the reward).

[maxerickson]

The 1% payout you describe seems to be about the max that customers end up with. Maybe some store specific cards are slightly higher, and maybe the right airline miles.

[zeroonetwothree]

There are several cards that give 2% flat on all purchases. You can also do much better if you use specific categories across multiple cards, for example there are cards that give 5% for restaurants.

[gsibble]

Most of those very high reward rate cards come along with significantly higher interchange fees (4-5% or even higher). Merchants abhor them.

[nkurz]

I'm dubious. I just glanced at my interchange plus billed Merchant Account Statement, and the highest I saw was 2.95% + 20 cents for a couple international business rewards cards. I suppose you could count this as 5% for an under $10 purchase, but do you have a specific example of a card that exceeds 4% on larger transactions?

[smsm42]

There are cards that do that - e.g. some of the merchants have store cards that give you immediate discount - e.g. I have one that makes 5% off anything I buy in a particular big store chain. I guess for airlines it is worth it even more since airline tickets cost hundreds of dollars, so if they can avoid paying couple of percents of each transaction to intermediaries by having their own card brand that adds up to serious money, and since they control points program they can give out points so that it's still profitable to them.

[Dobbs]

At least for Airlines it seems to be more about status than the flights.

Having a premium membership on United for example lets you use expedited lines for checking luggage, security and boarding. In addition you get free checked luggage, better customer support and are more likely to get upgraded to first class and are all around treated better by United.

[lionhearted]

If you're in a business with small-ish margins and your suppliers don't charge you extra for taking credit card, a cashback or other rewards card can actually measurably move the bottom line.

[gsibble]

Completely agree. But since VISA/MC control the network, even your basic debit card from a credit union costs merchants 2-3%.

What is needed is an entirely new network....

[gsibble]

Well, yes and no. Indeed those fees do pay for cash-back and airline points and such, but most benefits-style cards have significantly higher fees than the standard 2-3%. For instance, my research last year showed that my AAdvantage Citi card was closer to 5% in total fees to the merchant. This is what is called a non-qualified rate. You can read more about it here:

http://en.wikipedia.org/wiki/Merchant_account#First_Tier_-_Q...

And an example of a processor's fee schedule here:

http://www.gotmerchant.com/merchant_fees.php

Meanwhile, my debit cards (which are almost always processed as credit since I don't like typing my PIN) still collect 2-3% and I get no benefits.