4 ms·

But that's only like 2%. Why still keep around people who are clearly taking advantage of higher rates of cash back like 5% and not paying anything in interest

But that's only like 2%. Why still keep around people who are clearly taking advantage of higher rates of cash back like 5% and not paying anything in interest though? What's the benefit of keeping them as customers?

mandelbrotwurst 7y ago
It's closer to 3%, and I don't think there's a way to beat that on the cash back except on a per category basis. Also, a lot of folks end up carrying a balance in spite of their best intentions. I suspect this happens relatively often even for folks with a long history of not doing so - e.g. maybe you get fired for the first time and start running up a balance, not long before you've run up some significant interest charges.
- mehrdadn 7y ago
  It's around 2% https://www.valuepenguin.com/what-credit-card-processing-fees-costs https://www.valuepenguin.com/what-credit-card-processing-fee... And then there's huge credit card bonuses like $150 for Chase Freedom which is like $7.5k of spending's worth... But again, that doesn't really answer my question. I very much realize lots of people do pay interest. But there are also people who don't, and possibly never have, for many years. I'm asking why do they keep those people around as customers if they're literally losing money on them? To me the obvious answer is they're still bringing value, and the only realistic form that can take as I see it seems to be their transaction data.
  - porpoisemonkey 7y ago
    It looks like most 5% cash back cards have a hard limit ($1500/quarter seems to be common limit) to the amount you can get back and offer an "unlimited" cash back at a rate at or lower than 2%. https://www.magnifymoney.com/blog/best-of/10-best-5-cash-back-credit-cards/#CashBackCreditspecial https://www.magnifymoney.com/blog/best-of/10-best-5-cash-bac... This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases.
    - mehrdadn 7y ago
      > This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases. And that assumption is exactly what I'm saying isn't universally true. My entire point is there are customers who just rotate cards instead of still using it for lower cash back. Who do this for years. Without racking up any interest. Why do those customers' accounts get kept open?
      - mandelbrotwurst 7y ago
        What I was saying above is that I wouldn't be surprised if a high enough percentage of even the customers who "beat the system" so to speak for many years eventually slip up that it makes up for the rest. If that's the case, and you can't predict who exactly that subset is going to be, you keep all of them around.
  - gnaritas 7y ago
    They do bring value, the same value a lottery winner brings to the lottery; that it's possible and people do win (or can always avoid interest paying off balance) keeps everyone else trying thinking they'll be the lucky one (they'll always pay off their balance). If you refused these people, then there's less incentive to play their game. People don't like games that can't be won, but they appear to like games with terrible odds in favor of the house that can be won.
  - nullc 7y ago
    Even a lot of the unlimited 2%-3% cards rate limit you by delaying how often you can pay the bill, so essentially your credit limit limits the amount of reward you can get. Fun fact: you can pay your US tax return with a credit card for a ~1.5% fee.
waynesonfire 7y ago
You also end up spending more, apparently--12 to 20% more. https://www.youtube.com/watch?v=MFkBoXhl5SU https://www.youtube.com/watch?v=MFkBoXhl5SU
- mehrdadn 7y ago
  They keep around customers who operate at losses for them because then they spend more? So they want these customers to operate at even larger losses?
  - ilikehurdles 7y ago
    I’m not aware of any card that gives flat out unconditional 5% cash back. You sometimes have these elevated award rates but for very specific merchant partners, limited periods of time, with some cap on the total amount received, or limits on how the reward can be redeemed. The base cash back on reward cards hovers between 1 and 2 percent, even ones with high yearly fees (another area where the margin for the issuer is further elevated). The high yearly fee incentivizes card holders to “get their money’s worth” by using the card more.
    - mehrdadn 7y ago
      Nobody said unconditional. You just rotate the cards in your wallet and use whatever 5% category fits your purchase. You might not do this, but there are people who do, and never pay interest. They clearly operate at a loss for the company year after year. I'm asking why their accounts aren't closed.
      - kube-system 7y ago
        Because for every person who signs up and causes them a loss, there’s dozens of others enticed by the same rewards programs who make them a profit. Credit card companies aren’t having any problems being profitable. I would imagine the number of people who only purchase things that are in the 5% category on their card is extremely small.
bsder 7y ago
The merchants have to pay a percentage. So, by encouraging the use of credit cards for smaller and smaller transactions, the credit card companies take a bigger and bigger bite from the merchant. That's all on top of any annual fees and interest charges that the credit card companies hit the customer with.

mandelbrotwurst 7y ago

It's closer to 3%, and I don't think there's a way to beat that on the cash back except on a per category basis. Also, a lot of folks end up carrying a balance in spite of their best intentions. I suspect this happens relatively often even for folks with a long history of not doing so - e.g. maybe you get fired for the first time and start running up a balance, not long before you've run up some significant interest charges.

mehrdadn 7y ago
It's around 2% https://www.valuepenguin.com/what-credit-card-processing-fees-costs https://www.valuepenguin.com/what-credit-card-processing-fee... And then there's huge credit card bonuses like $150 for Chase Freedom which is like $7.5k of spending's worth... But again, that doesn't really answer my question. I very much realize lots of people do pay interest. But there are also people who don't, and possibly never have, for many years. I'm asking why do they keep those people around as customers if they're literally losing money on them? To me the obvious answer is they're still bringing value, and the only realistic form that can take as I see it seems to be their transaction data.
- porpoisemonkey 7y ago
  It looks like most 5% cash back cards have a hard limit ($1500/quarter seems to be common limit) to the amount you can get back and offer an "unlimited" cash back at a rate at or lower than 2%. https://www.magnifymoney.com/blog/best-of/10-best-5-cash-back-credit-cards/#CashBackCreditspecial https://www.magnifymoney.com/blog/best-of/10-best-5-cash-bac... This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases.
  - mehrdadn 7y ago
    > This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases. And that assumption is exactly what I'm saying isn't universally true. My entire point is there are customers who just rotate cards instead of still using it for lower cash back. Who do this for years. Without racking up any interest. Why do those customers' accounts get kept open?
    - mandelbrotwurst 7y ago
      What I was saying above is that I wouldn't be surprised if a high enough percentage of even the customers who "beat the system" so to speak for many years eventually slip up that it makes up for the rest. If that's the case, and you can't predict who exactly that subset is going to be, you keep all of them around.
- gnaritas 7y ago
  They do bring value, the same value a lottery winner brings to the lottery; that it's possible and people do win (or can always avoid interest paying off balance) keeps everyone else trying thinking they'll be the lucky one (they'll always pay off their balance). If you refused these people, then there's less incentive to play their game. People don't like games that can't be won, but they appear to like games with terrible odds in favor of the house that can be won.
- nullc 7y ago
  Even a lot of the unlimited 2%-3% cards rate limit you by delaying how often you can pay the bill, so essentially your credit limit limits the amount of reward you can get. Fun fact: you can pay your US tax return with a credit card for a ~1.5% fee.

waynesonfire 7y ago

You also end up spending more, apparently--12 to 20% more. https://www.youtube.com/watch?v=MFkBoXhl5SU https://www.youtube.com/watch?v=MFkBoXhl5SU

mehrdadn 7y ago
They keep around customers who operate at losses for them because then they spend more? So they want these customers to operate at even larger losses?
- ilikehurdles 7y ago
  I’m not aware of any card that gives flat out unconditional 5% cash back. You sometimes have these elevated award rates but for very specific merchant partners, limited periods of time, with some cap on the total amount received, or limits on how the reward can be redeemed. The base cash back on reward cards hovers between 1 and 2 percent, even ones with high yearly fees (another area where the margin for the issuer is further elevated). The high yearly fee incentivizes card holders to “get their money’s worth” by using the card more.
  - mehrdadn 7y ago
    Nobody said unconditional. You just rotate the cards in your wallet and use whatever 5% category fits your purchase. You might not do this, but there are people who do, and never pay interest. They clearly operate at a loss for the company year after year. I'm asking why their accounts aren't closed.
    - kube-system 7y ago
      Because for every person who signs up and causes them a loss, there’s dozens of others enticed by the same rewards programs who make them a profit. Credit card companies aren’t having any problems being profitable. I would imagine the number of people who only purchase things that are in the 5% category on their card is extremely small.

bsder 7y ago

The merchants have to pay a percentage. So, by encouraging the use of credit cards for smaller and smaller transactions, the credit card companies take a bigger and bigger bite from the merchant. That's all on top of any annual fees and interest charges that the credit card companies hit the customer with.