How Do Banks Make Money with Cash Back Credit Cards?

With so many people carrying cash back credit cards in their pockets, you may be wondering how the banks can make any money in this way. In actuality, the banks are pulling in money hand over fist with these cards, and here is how.

First of all, there may be a few savvy cardholders who pay off their balance at the end of the month and, therefore, do not pay any finance charges to the bank. As a result, the bank is actually paying them to use their card. But, the sad truth is that most people do not pay their balance off at the end of every month. Since the interest rates on these cards are higher than on traditional credit cards, the bank makes its money back – plus some – off of those customers that do not pay their balance off.

Even those cardholders that do pay off their balance are earning cash for the credit card companies. This is because the banks receive cash from the store where you make you make your purchase. That’s right, every time you swipe that card, the store you are buying from has to pay the bank a fee. And, research has shown that people are more likely to use their credit cards when there is a reward attached to its use. So, any way you cut it, the bank are doing just fine when it comes to cash back credit cards.