Monday, 22 April 2024

Here’s Who Really Makes Money From Credit Card Rewards

by BD Banks

<div>Here's Who Really Makes Money From Credit Card Rewards</div>

Image source: The Motley Fool/Upsplash

Rewards credit cards are popular, but there’s debate over who really makes money with them. Some say you’re not going to beat the banks at their own game. Others argue it’s possible to come out ahead if you know how to work the system.

In a way, both sides are right. Credit card issuers win overall. They paid out over $40 billion in rewards in 2022, but they charged over $130 billion in fees and interest, according to a report by the Consumer Financial Protection Bureau (CFPB).

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But the CFPB also found that some cardholders profited from their credit card use. So you can make money from your rewards — it all depends on what type of cardholder you are.

Revolvers pay, transactors get paid

The CFPB classifies credit card users as either revolvers or transactors. Here’s the difference:

  • Revolvers carry (revolve) a balance on their cards from month to month. The card issuer charges interest based on the balance and the card’s APR.
  • Transactors pay the full statement balance on their cards every month. Because they pay in full, they avoid interest charges.

It’s much better to be a transactor. The CFPB found that transactors earn 73% of total credit card rewards and pay only 6% of the total interest and fees charged. Revolvers, on the other hand, earn just 27% of the rewards but pay 94% of the interest and fees. They’re bearing the brunt of the costs while earning a much smaller chunk of the rewards.

When you pay credit card interest, that cuts into any money you’ve made on rewards. And credit cards have extremely high interest rates — the average is 21.59%, according to the Federal Reserve.

Because of those high rates, rewards rarely outweigh interest charges. The CFPB reported that “when a consumer revolves a balance on their credit card, the cost of interest and fees almost always exceeds the value of rewards the consumer may have earned.”

How to be a transactor with your rewards cards

If you want to make money with credit card rewards, the key is to be a transactor and pay in full. But if it was easy, everyone would do it.

I love using travel credit cards, so I know how important it is to pay off your full balance. Here are the best methods I’ve found for making this a habit.

Use your rewards card for your regular bills

Don’t change your spending habits just because you have a rewards card with a sky-high credit limit. A good way to stay safe is to keep everything exactly the same, except you start paying your bills with your rewards card. If you pay the same bills as before, you shouldn’t have trouble paying them back.

Only make purchases you can afford with money in your bank account

You’ll probably want to splurge on a big purchase every now and then. Maybe you’ve had your eye on a new laptop, or you want to treat yourself to a vacation.

There’s nothing wrong with this, if you can afford it. Before you make an expensive purchase, check that you have enough money in your bank account for it, and that money isn’t already set aside as your emergency fund. It’s fine to spend money on yourself when you can pay in full and don’t need to go into debt for it.

Build financial stability

Overspending isn’t the only reason people end up in credit card debt. It’s often caused by emergencies or just getting overwhelmed by bills.

Another crucial part of staying out of debt is building your financial stability. Specifically, save money toward an emergency fund so you’re prepared for anything. A good rule of thumb is to have enough in your emergency fund to cover three to six months of living expenses.

Also, make sure you can comfortably pay your bills every month. Look for places to reduce spending if necessary. When your bills take up most of your income, any added expense will cause issues.

Coming out ahead with credit card rewards

It’s certainly possible to profit from rewards credit cards. Plenty of cardholders do it by earning cash back or points that they use to save themselves money. It’s not complicated to come out ahead, either. Pay your credit card bill on time and in full, and you’ll be one of those transactors who earns rewards without any expensive interest charges.

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