From Financial Times (sub. required):
Answer: A LOT! Almost $23 BILLION in 2016 based on estimates from Instinet
These reward programs provide cash back or points (that can be exchanged for goods or services) to cardholders based on their spending habits. The FT article answers a few questions that students might have:
Who wins with these rich credit card reward programs?
In a word, consumers! “It is an amazing time to be a consumer,” says Mr Kelly. “Sign-up bonuses of 100,000 points on the Sapphire Reserve, up to 250,000 points on small-business cards from Amex, and more and more. Miles and points are cash, that’s what we teach people, and it’s certainly nice when the credit card companies are giving you $1,000, $1,500, $2,000 for getting a single credit card.” As for the card companies, this is your textbook case of the competitive fight for market share as they each try to grow their cardholder base.
How can they afford to make such great reward programs for consumers?
Think about all the interest the revolvers (those who don’t pay off their balances every month) pay on their cards. “The bank issuers and Amex have taken different approaches to making money from credit cards. Amex has traditionally earned the bulk of its revenue from the fees that merchants pay on each transaction, while banks collect more from interest on customers’ balances. In the jargon, Amex has a “spend-centric” model, while banks are “lend-centric”. That means Amex and banks are trying to encourage different patterns of use by their cardholders.” Remember that the average credit card rates hover in the high teens so thank the revolvers for all of these lucrative rewards.
What’s the best advice for consumers when it comes to rewards?
I liked what one analyst,Gary Leff, called the Golden Rule (bold is for emphasis). “Rewards cards generally have higher annual percentage rates. The game does not work at all if you are not paying off your cards or if you spend more than you would otherwise have spent. It requires a discipline that does not come naturally to everyone.”
One final open-ended question for your students to ponder: What percentage of credit card holders THINK that they will always pay off their credit card every month but DON’T? Why do you think this is the case?
Check out this NGPF Activity: Select A Credit Card and have your students use two of the comparison sites mentioned in the article, The Points Guy and the View From The Wing, to compare rewards programs.