I recently have had the opportunity to bring really attractive card deals to my readers and a common refrain so far has been, “what’s the catch?”
Obviously, when credit card companies give you generous gifts to sign up for their cards, as well as cashback or miles for your spending, they’re not doing it out of the goodness of their hearts. It doesn’t take a genius to know that they make good money out of their credit card business.
What exactly is the catch of credit cards and how do these companies earn money?
Interest, and all kinds of fees
Prudent users get rewarded with miles and cashback, and the financially reckless get punished with sky-high interest rates and late fees.
It goes without saying that you should pay off your bill every month without fail, but there’s always a segment of people who don’t, and these people pay for the generous rewards the rest of us enjoy.
Now, I’ve gotten a couple of late charges before – a side effect of having over twenty cards and a poor memory – but they’ve all been waived by the bank upon request. I’ve since placed them on GIRO so I don’t have to worry about it. Even if I did incur the ridiculous fees once in a while, the rewards I’ve gotten far outweigh the losses involved.
Annual fees are waivable for the vast majority of cards, and I’ve never paid for an annual fee ever across my numerous cards. Always ask for a fee waiver if they charge you; banks are happy to waive it for you, and if they don’t you can avoid paying the fee by cancelling the card.
There are people who don’t bother, and I thank such people for making the world a better place for the rest of us credit card optimisers.
Data is the new gold
When you spend on your cards, your bank starts to know your spending habits and they become good at marketing stuff to you. This gives them negotiating power to strike deals with merchants hungry for customers.
Some people don’t like the creepiness of this, and I guess cards like Apple Card give them the privacy they desire, but I personally don’t mind letting these giant companies know what I’m up to with my money as long as they keep giving me good rewards.
You could also top up money to services like Grab and Singtel Dash to avoid your bank knowing what you’re really spending on, but now Grab or Singtel knows, so… use cash? Ugh take my data please.
Merchants pay fees and raise prices
Merchants who accept credit card payments also need to pay the card companies a fee, typically 2 to 3% depending on their volume and type of business.
Some businesses charge a higher price for people who want to pay via card, but this is not allowed by credit card networks (eg. Visa, MasterCard etc.) and merchants risk losing their ability to accept cards if they get caught.
Thus, most businesses increase the price of their products to absorb the fees, which means everyone pays a higher price regardless whether they’re using a credit card or not.
It’s a rather unique situation where the catch of a product doesn’t affect its users but hurt the people who don’t use it. Essentially, this means that if you’re not using a card that gains you rewards, you’re paying for my cashback and miles. Thanks, I guess?
There are still people who think that not having credit cards is being financially prudent. You miss out on sign-up bonuses, lose out on miles and cashback when you spend, and don’t hit higher interest tiers in your savings account. That’s just financial illiteracy.
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