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Some people see travel reward points, cash back and other amazing credit card rewards companies are offering card users and think “Wow! What a deal!” Then there are those of us who wonder ‘what’s the catch’. There is, of course, always a catch.

So where does the money come from to pay for the rewards that so many of us are accustomed to getting back from our everyday purchases?

Well, first it’s important to realize that credit card companies are in the business of making money. The idea that they would just be giving away money doesn’t seem to fit this model. You can be sure they are not the ones paying for your credit card reward points.

How Credit Card Companies Make Money

There are three ways your credit card company is making money

  • Interest
  • Fees
  • Interchange

Interest and fees are the two parts of this equation that you are probably familiar with. Credit card companies are required by federal law to disclose these costs before you sign up with them. They are usually displayed in a chart like this one:


That third item, interchange, what’s that about? The reason you’ve never heard of it is because it is invisible to the consumer. The customer is not paying for this at all. The merchant is.

This means every time you buy a $1 coke, the business owner you are buying from is actually paying for you to be able to use a credit card. It’s usually anywhere from 2 to 5% for you to use your credit card plus a flat 10 cents fee. In the case of this otherwise inexpensive coca-cola, the business owner is suddenly paying 12-15 cents or 12 to 15% of revenue.

Yikes. That means as much as 50 to 100% of profit is being handed over to the credit card companies. The fees can become crippling and the business owner could actually be losing money in selling you that can of soda. This is the reason you see signs saying “$10 minimum credit card purchase” at many stores. These small mom and pop stores simply can’t afford to take credit cards below a certain amount.

Interest and fees contribute a small amount to paying credit card rewards but a large portion of your credit card rewards are paid through interchange. A business owner will pay more or less on interchange fees depending on the types of rewards offered. This means that a client using a company credit card rewards card that yields very high returns on rewards will be more expensive for a business owner than someone using a non-reward earning card or debit card.

The better you’re credit card reward deal is, the more your local business owners are paying. Is it fair to punish business owners for the luxury of getting a free flight at the end of the year? Honestly, i think the whole system punishes small business owners. So many of these business owners have low profit margins as is. Its sad to see that these interchange rates can often mean mom and pop shops closing their doors.

Is it our turn to start sharing the brunt of these fees as customers or do you think the whole onus should be on business owners who want to accept credit cards?

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