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  • This is Brian Kelly.

  • You'll often find him traveling.

  • I've been to Ghana now ten times.

  • I got to visit Liberia.

  • Took my parents to South Africa.

  • I love flying Emirates first classit's gaudy, it's gold.

  • You get caviar, and I have never paid for it.

  • So Brian traveled to all these places basically for free. And he did it using credit card rewards.

  • Banks promise offers like cashback, bonus miles, and cash bonuses to get you to sign up and spend.

  • And it's rewards like these that people like Brian have become masters at maximizing.

  • Ultimately though, someone is paying for these credit card rewards.

  • And there's a hidden battle going on over their future.

  • During the Great Recession, some of the biggest US banksWells Fargo, JP Morgan and Bank of Americahad a problem.

  • They weren't making as much money from mortgages.

  • So they shifted their business to credit cards.

  • And in order to get customers to sign up and spend on their cards they offered bigger and better rewards.

  • "In 2011 we saw our first ever 100,000 point offer, Chase offered on a British Airways Visa.

  • 100,000 points for a credit card.

  • Wild!

  • And really I think what JP Morgan/Chase was doing was thinking we gotta focus more on consumer lending and not just on that corporate lending or even mortgages.

  • As banks expanded rewards, more people starting using rewards cards.

  • By 2018, 92% of all credit card purchases were made on rewards credit cards.

  • That's up from just 67% in 2008.

  • But it's not the banks that ultimately pay for these rewards.

  • So when a customer uses a credit card to buy something, the store is charged what's called an interchange fee.

  • That fee is a percentage of the total sale.

  • It's the bank that issued the card that collects the interchange fee.

  • And it's this money that they heavily rely on to pay for cardholder rewards.

  • They're making money on your annual fee and on interest.

  • But the big way with these premium credit cards is the interchange fee.

  • That's the bread and butter.

  • Interchange fees aren't the same across all credit cards.

  • Cards with no low rewards typically have an interchange of about 1.5% of the purchase price.

  • While cards with bigger rewards can have an interchange fee of nearly 3%.

  • And the divide between these two types of cards has increased.

  • Banks can make about $0.25 more per average purchase if the customer uses a premium rewards card over a basic one.

  • In 2017, retailers paid card issuers $43.4 billion dollars in interchange fees.

  • So it's no surprise that stores aren't a huge fan of these credit card rewards.

  • They don't really want to pay for your free trip to South Africa.

  • Most stores don't have negotiating power over these interchange fees.

  • Payment networks like Visa and Mastercard require them to "honor all cards" which means they have to accept both low fee and high fee credit cards.

  • And as a result some stores reported that they've increased retail prices in order to make up for the cost of accepting credit cards.

  • Which means even if you don't have a rewards credit card, you may still be paying for those rewards.

  • So if you're using cash, you're basically paying for my points.

  • So it can be argued that people who can't obtain credit, those with lower incomes are basically funding the system for others.

  • Others will say, well the merchants get paid more, they get paid on time, there's less theft when people use credit cards.

  • It's an interesting ecosystem.

  • I won't get into the ethics but I will maximize my part of it.

  • Some major retailers have indicated that they'll challenge the "honor all cards" rule so that they can reject cards with higher fees.

  • And if stores succeed at driving down interchange fees, banks are likely to respond by chopping rewards.

  • This isn't a hypothetical outcome.

  • When credit card interchange fees were capped at .3% in Europe, banks responded by cutting rewards.

  • For now, with so many credit card rewards out there, it's hard to know which deals are better than others.

  • But with the cost of these rewards built into the things that we buy everyday, just using a rewards card at all can be beneficial.

  • If you're using a debit card or god forbid, cash, for purchases, you're literally leaving points and money on the table.

  • It's like throwing money away every time you use cash.

  • So get debt free, get disciplined with your finances, put your expenses on each month, pay them off, earn the points, and avoid interest.

  • That's how you win at the points game.

  • So Brian Kelly, the card rewards expert in this video had a lot of great tips about how to get the most out of your credit card rewards.

  • We didn't have time to include them all in this video, but I wanted to share them with you in a video extra.

  • You can check out those extra tips at the Vox Video Lab.

  • If you haven't already heard, we've launched a paid membership program right here on YouTube, called the Video Lab.

  • For a monthly fee, subscribers get access to tons of special features, including these tips on credit card rewards.

  • So if you're not already a member, and you're interested, head on over to to sign up.

This is Brian Kelly.

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Who Actually Pays for Your Credit Card Rewards?

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    Liang Chen posted on 2019/02/17
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