Credit Tips: Credit Cards With Big Rewards

Posted On: May 1, 2006

Author: newyearsday1985
Posted: Thu Dec 01, 2005 8:35 pm
Post subject: Aren’t credit card companies losing by giving 5% cash back?

Aren’t credit cards like citi dividend, citi MTVU, chase cash plus rewards, discover restaurant losing money by giving you 5% cash back?

From each credit card transaction, the credit card company earns about 2-2.5% of your purchases. If you use the credit card exclusively to get 5% from your purchases and always pay your balance in full, won’t the credit card company lose 2.5-3% from your purchases?

Author: Polonius
Posted: Thu Dec 01, 2005 9:51 pm
Post subject:

There’s an old saying that (freely translated and cleaned up a bit) says that if your grandmother had four wheels she’d be a bus.

Point is that the banks offer spectacular deals with the expectation that enough people will NOT pay in full evey month to make up for all the people who do. How about 0% balance transfer offers when the banks are paying 4% on savings account deposits? Does that make any sense either?

I remember a few years back when I made hundreds of dollars every year just switching my long distance carrier. The telephone companies would send me checks of $10-$150 (!) that would switch my service if I cashed them. I had no problem cashing them and switching service. I never make long distance calls on my fax line anyway.

I guess those promotions weren’t too profitable for the telephone companies because you don’t see those any more. Can’t blame them for trying. Remember, these banks often have expensive marketing departments, slick marble buildings, and money to burn for advertising. If they lose a couple of hundred million dollars on these promotions year after year maybe they’ll notice and make some changes to them.

Author: Daniel
Posted: Fri Dec 02, 2005 10:41 pm
Post subject:

One would think so but banks have a lot of dynamics involved and while the 5% pay in full reward customer is a loss leader, many don’t pay in full and as you indicated they do get a transaction fee.
There have been a few instances where banks have used profitability models and imposed yearly fees on the unprofitable customer like MBNA or reduced levels of benefits or abandoned the specific card like Chase.

Part of the dynamics of portfolio management is the relationship of both hard and soft benefits to the bank that the pay in full customers brings to the table.
Among them:
Branding and name recognition, it is important to just about any business but especially banks.

Having a sufficient level of prime borrower accounts in their outstanding balance offsets the portion that will go bad.
Delinquency percent is both a key regulatory and performance indicator for good management and investors.
Keeps the regulators off them and adds shareholder value.

Cross sell opportunities such as deposit accounts, stock management, real estate loans etc… give them tiers to make money on other products.

Of course some will carry a balance at least part of the time and they make interest off them the old fashion way.

And to add to what Poloniusi said, banks often just reek of money when you’re surrounded by marble and paintings on the ceiling of the rotunda marketing will … well you get the idea….lol