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Something I never entirely get about the credit card business is how they can offer deals without it being obvious they only make money if you make mistakes? I

Something I never entirely get about the credit card business is how they can offer deals without it being obvious they only make money if you make mistakes? If it was a good deal for me, surely the bank loses some money on that?

floatrock 2y ago
The pejorative term that credit card companies use for people who pay off the entire balance every month is "deadbeats". https://www.cnbc.com/select/credit-card-deadbeat/ https://www.cnbc.com/select/credit-card-deadbeat/
- sleepybrett 2y ago
  I mean, deadbeats are probably still worth it in the long run. Over a long enough horizon eventually a person who pays off their cards every month runs into an emergency that will put them in a situation where they get stuck in a debit trap, them the banks eat for free.
- denimnerd42 2y ago
  I guess. Revolving credit is expensive for the bank to hold. They have to allocate a lot of capital to back the revolving unsecured debt compared to other secured loans. I think they'd rather just make money on the regular fees and not have to worry about people holding balances. By providing credit they can charge a higher transaction fee than a debit card so that's their value add. Retailers are willing to pay for that access to consumer credit. That's why credit cards are so popular in America vs other countries. They can charge a transaction fee that actually makes a profit. If they are regulated to a low fee then they can't give cards to anyone but the highest of FICO scores because the debt itself is so risky.
  - Finnucane 2y ago
    The interest and fees on accounts that carry a balance are enormously lucrative for the banks.
    - denimnerd42 2y ago
      I don't know.. Maybe in the good times. They are highly risky though and require a lot of capital backing that may not show up directly on the P&L. https://www.reuters.com/business/finance/bank-america-profit-falls-lower-customer-interest-payments-2024-04-16/ https://www.reuters.com/business/finance/bank-america-profit... I guess I could look more into the 10-K and see if that information is transparent to the public.
- darth_avocado 2y ago
  Meanwhile, if I don't pay off my balance, they ding my credit scores. Seems like they want to have their cake and eat it too.
- huntedsnark 2y ago
  This anecdote and using the word "deadbeat" is oft repeated but doesn't really have much basis in reality (even the article you linked doesn't cite any sources for the term). Credit card transaction fees generate revenue regardless of when you pay.
denimnerd42 2y ago
I always assumed banks made money on credit cards from the transaction fees. I think the interest rates are mostly there to scare you into paying your bill. It seems like once a CC balance gets out of control the bank's ability to recapture that money is limited since the card is unsecured. I guess they make more money off the people that use a CC as as a temporary loan and always repay but customers with that risk profile are generally one step away from never paying it off.
- perks_12 2y ago
  FYI, latest Q-10 of American Express has Merchant Fees at approximately double the revenue from interest payments. At least there it is true. [0]: https://s26.q4cdn.com/747928648/files/doc_financials/2024/q1/Q1-2024-Earnings-Tables.pdf https://s26.q4cdn.com/747928648/files/doc_financials/2024/q1...
  - denimnerd42 2y ago
    And the fees are basically pure profit while the interest payments have a huge cost and risk.
zaik 2y ago
https://www.bitsaboutmoney.com/archive/anatomy-of-credit-card-rewards-programs/ https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...
myfavoritetings 2y ago
It is simple really, there are more suckers paying high credit card interest than there are people collecting credit card rewards. As someone who always pays your bill off every month any rewards you collect are essentially paid for by people with interest payments
tiffanyh 2y ago
There's multiple revenue stream for banks as it relates to credit card. There's interchange, interest, annual fees and more.
bgirard 2y ago
Easy. There's a few customer profile: 1) People who will always pay it in full 2) People who incorrectly think they're 1) but wont pay in full for some reason 3) People that don't understand the cost of 20% APR 4) People that need the money and don't have a choice Plus CC make money on transaction fees and sometimes annual fees.
throwaway22032 2y ago
It's a good deal for you and I. But half of the population are of below average intelligence.
lenerdenator 2y ago
Credit is basically mandatory to survive in the US today. Most live paycheck-to-paycheck, wages have been stagnant for decades, and prices have been increasing. Add in the fact that people are both exhausted from work and that there's fewer domestic "partnerships" that allow division of labor (however that might occur), you have more opportunities for slick marketing and financial jargon to make unappealing terms slide past people.
- mc32 2y ago
  Even worse, in my opinion, is the proliferation of the buy now pay later schemes even apple are embracing At least with layaway plans, you had delayed gratification.
- mgraczyk 2y ago
  Most of your specific points are false. In fact, the majority of Americans self-report that they have at least 3 months of emergency savings, and this is backed by savings account data. Credit is necessary for some people, but the actual number is closer to 20% than 50%.
  - lenerdenator 2y ago
    Got a source? This article says 58% of Americans say they live paycheck-to-paycheck: https://www.cnbc.com/2024/04/09/most-of-americans-are-living-paycheck-to-paycheck-heres-why.html https://www.cnbc.com/2024/04/09/most-of-americans-are-living... This article mentions 78%: https://www.forbes.com/advisor/banking/living-paycheck-to-paycheck-statistics-2024/ https://www.forbes.com/advisor/banking/living-paycheck-to-pa...
    - mgraczyk 2y ago
      The definitions of "paycheck-to-paycheck" are different in different surveys. For example, in the second one you linked the question asked was something like "How difficult would it be for you if your paycheck was delayed by one week?" and they took anybody who said more than "not difficult" as "living paycheck to paycheck". My definition is more strict.
gojomo 2y ago
For those people who don't "make mistakes", the card issuers are still earning: • part of the 2-3% added to every charge • fees from promotional marketing, guided by the info in your purchase history, to those customers • fees from related services the same customers may purchase from the same bank Even when the high rewards cards marketed to conscientious low-credit-risk customers send back some of that 1-3% as "miles" or "points" or "cash back", the other information/marketing values about high-spending, reliable-paying customers remain interesting.
kemiller2002 2y ago
I worked in CC loan and processing for a period of time. Issuing cards is really a form of hedging. They make money on some and lose on others. The point is to win more than you lose. That's all. There are secondary and tertiary ways of making money off of the cards too. They can sell the pool of underperforming cards for a smaller sum of money, and they can write off losses to help with other ventures. Just a couple of examples.
- graemep 2y ago
  nitpick: its not hedging, its risk diversification.

floatrock 2y ago

The pejorative term that credit card companies use for people who pay off the entire balance every month is "deadbeats". https://www.cnbc.com/select/credit-card-deadbeat/ https://www.cnbc.com/select/credit-card-deadbeat/

sleepybrett 2y ago
I mean, deadbeats are probably still worth it in the long run. Over a long enough horizon eventually a person who pays off their cards every month runs into an emergency that will put them in a situation where they get stuck in a debit trap, them the banks eat for free.
denimnerd42 2y ago
I guess. Revolving credit is expensive for the bank to hold. They have to allocate a lot of capital to back the revolving unsecured debt compared to other secured loans. I think they'd rather just make money on the regular fees and not have to worry about people holding balances. By providing credit they can charge a higher transaction fee than a debit card so that's their value add. Retailers are willing to pay for that access to consumer credit. That's why credit cards are so popular in America vs other countries. They can charge a transaction fee that actually makes a profit. If they are regulated to a low fee then they can't give cards to anyone but the highest of FICO scores because the debt itself is so risky.
- Finnucane 2y ago
  The interest and fees on accounts that carry a balance are enormously lucrative for the banks.
  - denimnerd42 2y ago
    I don't know.. Maybe in the good times. They are highly risky though and require a lot of capital backing that may not show up directly on the P&L. https://www.reuters.com/business/finance/bank-america-profit-falls-lower-customer-interest-payments-2024-04-16/ https://www.reuters.com/business/finance/bank-america-profit... I guess I could look more into the 10-K and see if that information is transparent to the public.
darth_avocado 2y ago
Meanwhile, if I don't pay off my balance, they ding my credit scores. Seems like they want to have their cake and eat it too.
huntedsnark 2y ago
This anecdote and using the word "deadbeat" is oft repeated but doesn't really have much basis in reality (even the article you linked doesn't cite any sources for the term). Credit card transaction fees generate revenue regardless of when you pay.

denimnerd42 2y ago

I always assumed banks made money on credit cards from the transaction fees. I think the interest rates are mostly there to scare you into paying your bill. It seems like once a CC balance gets out of control the bank's ability to recapture that money is limited since the card is unsecured. I guess they make more money off the people that use a CC as as a temporary loan and always repay but customers with that risk profile are generally one step away from never paying it off.

perks_12 2y ago
FYI, latest Q-10 of American Express has Merchant Fees at approximately double the revenue from interest payments. At least there it is true. [0]: https://s26.q4cdn.com/747928648/files/doc_financials/2024/q1/Q1-2024-Earnings-Tables.pdf https://s26.q4cdn.com/747928648/files/doc_financials/2024/q1...
- denimnerd42 2y ago
  And the fees are basically pure profit while the interest payments have a huge cost and risk.

zaik 2y ago

https://www.bitsaboutmoney.com/archive/anatomy-of-credit-card-rewards-programs/ https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...

myfavoritetings 2y ago

It is simple really, there are more suckers paying high credit card interest than there are people collecting credit card rewards. As someone who always pays your bill off every month any rewards you collect are essentially paid for by people with interest payments

tiffanyh 2y ago

There's multiple revenue stream for banks as it relates to credit card. There's interchange, interest, annual fees and more.

bgirard 2y ago

Easy. There's a few customer profile: 1) People who will always pay it in full 2) People who incorrectly think they're 1) but wont pay in full for some reason 3) People that don't understand the cost of 20% APR 4) People that need the money and don't have a choice Plus CC make money on transaction fees and sometimes annual fees.

throwaway22032 2y ago

It's a good deal for you and I. But half of the population are of below average intelligence.

lenerdenator 2y ago

Credit is basically mandatory to survive in the US today. Most live paycheck-to-paycheck, wages have been stagnant for decades, and prices have been increasing. Add in the fact that people are both exhausted from work and that there's fewer domestic "partnerships" that allow division of labor (however that might occur), you have more opportunities for slick marketing and financial jargon to make unappealing terms slide past people.

mc32 2y ago
Even worse, in my opinion, is the proliferation of the buy now pay later schemes even apple are embracing At least with layaway plans, you had delayed gratification.
mgraczyk 2y ago
Most of your specific points are false. In fact, the majority of Americans self-report that they have at least 3 months of emergency savings, and this is backed by savings account data. Credit is necessary for some people, but the actual number is closer to 20% than 50%.
- lenerdenator 2y ago
  Got a source? This article says 58% of Americans say they live paycheck-to-paycheck: https://www.cnbc.com/2024/04/09/most-of-americans-are-living-paycheck-to-paycheck-heres-why.html https://www.cnbc.com/2024/04/09/most-of-americans-are-living... This article mentions 78%: https://www.forbes.com/advisor/banking/living-paycheck-to-paycheck-statistics-2024/ https://www.forbes.com/advisor/banking/living-paycheck-to-pa...
  - mgraczyk 2y ago
    The definitions of "paycheck-to-paycheck" are different in different surveys. For example, in the second one you linked the question asked was something like "How difficult would it be for you if your paycheck was delayed by one week?" and they took anybody who said more than "not difficult" as "living paycheck to paycheck". My definition is more strict.

gojomo 2y ago

For those people who don't "make mistakes", the card issuers are still earning: • part of the 2-3% added to every charge • fees from promotional marketing, guided by the info in your purchase history, to those customers • fees from related services the same customers may purchase from the same bank Even when the high rewards cards marketed to conscientious low-credit-risk customers send back some of that 1-3% as "miles" or "points" or "cash back", the other information/marketing values about high-spending, reliable-paying customers remain interesting.

kemiller2002 2y ago

I worked in CC loan and processing for a period of time. Issuing cards is really a form of hedging. They make money on some and lose on others. The point is to win more than you lose. That's all. There are secondary and tertiary ways of making money off of the cards too. They can sell the pool of underperforming cards for a smaller sum of money, and they can write off losses to help with other ventures. Just a couple of examples.

graemep 2y ago
nitpick: its not hedging, its risk diversification.