Why do Credit Cards Offer Rewards?

Photo of reward credit cardsYou could argue that having a little piece of plastic that lets you buy things easily and securely in seconds would be something worth paying for, right? Forget about carrying cash everywhere, or waiting days or weeks for a loan application to come through, because this little gizmo will fund your lifestyle right now! Nowadays, we’ve all bought into the convenience and safety of having a credit card, so why would any provider offer even more rewards?

Here are 3 reasons why rewards have become so competitive among providers:

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1. To keep you as a customer.

The average credit card APR as of this writing weighs in at around 14.9%. That’s a big chunk of profit for the providers, and they want to keep you using their cards for as long as possible. If a small cashback reward will convince you to buy something that you were a little undecided about, then it’s a great investment for them.

In theory, the credit card providers are taking a risk. After all, if you pay off your balance in full each month, you get the full benefit of the rewards, and none of the high interest charges. But the fact is that there are enough people out there that don’t clear their balance for long periods of time, and that’s when credit card rewards pay back the providers in spades.

2. To keep their business partners happy.

Imagine you were in charge of running a chain of hotels in a stormy economy. You would undoubtedly want to try any means at your disposal to keep occupancy rates as high as possible, and this is always going to involve some kind of investment. Traditionally, this involved paying for advertising, but increasingly, it has evolved into forging relationships with other businesses, including credit card providers.

This works both ways: if your hotel chain promises to reduce its rates if the booking is paid for with a particular brand of credit card, then the card provider can offer great rewards to its customers, without having to bear the full cost of them. In return, the hotel opens up a whole new lucrative sales channel.

This works out great for both companies for as long as bookings keep coming in. Once they start to dry up, the credit card partners are more likely to be dropped in favor of a competing bank, putting the original provider at a disadvantage. These kind of rewards are especially valuable to card providers, and it’s not something they want to give away lightly.

3. To keep you away from their competitors.

When you’ve got ongoing customers in any business, especially ones that are paying large sums of money, you’ll do anything to hang on to them. Credit card providers are no different, and use rewards to remind you that they value your business, and also to encourage you to keep spending.

They also use rewards to entice you away from their competitors. Even though you’ll see offers of 0% APR balance transfers for 6, 12, even 18 months, you can be sure that the long term profit after these introductory rates are finished will more than make up for the offer.

So there you have 3 reasons why rewards are offered, but there may be many more. If you’ve any other ideas, we’d love to hear about them in the comments below.

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