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How do they make credit cards

how do they make credit cards

Here's one reason that's being overlooked in answers so far. (@ChrisInEdmonton, this is for your comment on @Chad's answer.)

How do credit card companies make money? Sure, there's interest charges, but those are offset significantly by the cost of borrowing money, and by people defaulting on their debt / entering bankruptcy. The other way they make money is by processing transactions . They get a cut of whatever you buy.

If you're a high-income person, and you're going to process a lot of expenditures with this credit card, your business is worth more. They will be willing to bribe you with things like cash-back, frequent flier miles, and insurance on your auto rentals, so that they can be your #1 go-to card.

(This works in

concert with the way that some credit card vendors with richer clientele overall - American Express - get to charge higher merchant fees for access to these customers' wallets. But that was mentioned in other answers.)

If you're not a high-income person, your business is worth less. If you go somewhere asking for credit, they're going to try and give you a card which will earn them the most money - which probably isn't the one where they give you back 50% of their transaction fee in rewards. It's a calculated risk, since they still have to compete against cash, debit cards, and all the other credit card companies, so they don't have you totally over a barrel, but you shouldn't expect as many freebies, either.

Category: Credit

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