How Providers Make Money Out of Rewards Credit Cards

by John Stevenson on November 2, 2010

The main method that credit card companies use to make money out of rewards cards is by manipulating man’s inalienable, God-given urge to make profit. As the free market principle gets more and more embedded in society, it is becoming less and less satisfying to simply spend money. People want to get stuff for free, and this is where rewards credit cards come in. If you have such a card, you may feel you are getting something extra for your cash, thus creating value.

It is a great temptation to turn everyday purchases such as groceries and gas into unique items or experiences, like a trip to an exotic destination or visiting an open air spa. It appears like you are getting something for nothing. We all know that nothing comes for free; yet, some of us have never come to believe it. The worst part is that most of these people are holders of rewards credit cards.

You lose points (money), they make profit

Card users rarely take into consideration the risks involved, and the terms and conditions can be quite complicated. Oftentimes, the company changes the rules seemingly spontaneously, and this proves detrimental to the holder. For example, if you fly from Canada to the U.S. on Air Canada through Aeroplan (the two establishments are in partnership), you will find out that you have to pay extra for luggage on the way back. The extra fee is either noted in fine print or not mentioned at all. Another example: you can lose Air Miles points. These are not unconditionally given to you, as you must keep your payments and purchasing up to date and charge a whole lot to the card. The interest charges possibly outweigh the benefits that come with rewards.   

You earn all bonuses and still have to pay

If you collect a certain amount of points, you are eligible for free flights, but you are still required to pay all taxes, fees, and insurance costs. Some of the Air Miles subscribers call the deal a “mixed bag”. You can get a free magazine subscription and a one-week trip to Trinidad, but you have to spend a lot of money to get the rewards points you need. Some magazines offer similar bonus programs to their loyal clients (a trip to an exotic country) for less money; so, that’s something you might want to check out before applying for a rewards card.

A coalition of businesses rips off your pocket

So, how do rewards card providers make money? These companies form coalitions with other businesses such as grocery store franchises, gas chains, and others. For example, Aeroplan is in coalition with Air Canada and Esso, among other establishments. Whenever an Aeroplan client takes a flight on Air Canada or fills up at Esso, he or she earns miles. In reality, Aeroplan’s partners are purchasing miles from it, and Aeroplan’s clients are credited with these miles. Aeroplan profits on the sale of miles to partners. This profit is reinvested in discounted Air Canada seats or other rewards, and Aeroplan profits from the spread – the difference between what it costs to the program to purchase the rewards and what the points were sold for. Aeroplan also manages the rewards program for its partners and earns money from this. Finally, it is estimated that 17 percent of all Aeroplan miles are never redeemed. In this case, credit card providers make money, with you freely giving it to them.

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