Why do credit card companies offer such great deals?

Why do credit card companies offer these great deals?

We’ve had a lot of our readers ask us, “Why are these companies willing to offer these great deals?” I’ve had quite a few people ask me lately, “What is the catch?”  I know that it seems unrealistic, but you have to remember that there are people like the Utahdealdiva that get cartloads of groceries for free.  It does take some discipline to cut the coupons and route your trips to a few grocery stores, but you can do it too.  She does a great job of showing you how to do it too.

Let me outline why I think it is worth it to them.

1. Transaction Fees- Credit card companies charge the vendor anywhere from 2-5% for each transaction.  This means that if you charge $10,000 on the card, they are going to rake in a minimum of $200.
2. Annual Fee- Some of these card companies rely on you spending $100 each year to renew the option to have the card.  Let’s say that you keep the card for 5 years, they are going to score another $500 on the deal
3. Volume Purchasing- They buy the reward points from Delta, American Airlines, Starwood, etc.  for a low price because they are purchasing in large volume.
4. Higher APR- These card companies usually have higher interest rates than some other cards available.  They obviously count on you using the cards and not paying the balances.  If you run up a high balance then they are going to be scoring big bucks from you.
5. Other Fees- If you are late on your payment they can charge you $35 per late payment.  I’m sure that they have other options to make money from you on other hidden fees if you don’t pay off the balance each month.

I look at each of these categories, and don’t see any problems with any of them.

1. These are fees that are built into products.  You are charged the same whether you pay cash or not, so it is the same cost either way.
2. I don’t plan on paying annual fees unless they give me a good enough retention bonus.  Otherwise I won’t be paying.
3. I’m glad that they buy them in bulk.  It makes the bonuses either to award.
4. I never pay interest, so the APR could be 1000% and it wouldn’t make a difference to me.
5. I am always making my payments on time, so I don’t have to worry about late payments.

Let’s say you are walking by an Allstate office and you see on the window a special promotion that says, “We will give you a free candy bar for getting a quote.” You walk into the office and say, “What is the catch here?  How can you really be handing out candy bars for getting a quote?”

Allstate is more than willing to be handing out candy bars in order to give quotes.  They know that they aren’t going to get everyone’s business, but they are willing to give out a few candy bars because they will make more money from the new business than they spent on the new candy bars.

American Express, Citi, Chase, and all of the others look at it the same way.  They are willing to give up a few dollars in exchange for the potential income from the five different categories listed above.  They have done the math and they know that statistics show that they will make money in the long run.

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