Did you know that credit card companies do not want interest payments to be the major source of their income? Why else would they penalize you with high interest rates fully knowing that the high interest rates turn many customers averse to the concept of credit cards! The high interest rates are actually negative incentives to ensure that you do not overspend and then default payment. The more desirable stream of revenue for them is the 1.5% cut they get on your purchases. They charge the merchant close to 2.5% of the transaction value and pay an average of 1% to the customer in the form of cash backs. These schemes are so popular that several new cash back credit cards have been introduced into the market. To understand how cash back works, here is an insight into all the parties involved and how each of them gets a favorable deal.
Cash Back Credit Cards: Benefits for Merchants
Cash back credit cards are useful for shopkeepers and merchants during times when customers want to buy something, but do not have cash on their hands. These customers have a predictable source of income and can afford the purchase. However, with no ready cash, most of these willing customers would never return to buy. Perhaps they would make a purchase somewhere else when they had the cash. Merchants saw the opportunity loss and wanted someone to lock in the deal for them. They were ready to pay charges for the same. Cash back cards ensure that customers have the purchasing power even if they do not have cash, thus driving up sales for merchants.
Cash Back Credit Cards: Benefits for Customers
Cash back schemes reward the financially diligent customer and punish the ones that splurge without thinking. Customers not only get credit free money for 50 days (one billing cycle), but also get a 1.5% to 2% cash back on their purchases. This acts as an incentive to pay with the card, rather than with cash. The diligent customer will make the purchase with the card and pay at the end of the month, thus saving money!
Cash Back Credit Cards: Benefits for the Issuer
With cash back credit cards, the issuer gets a 1.5% interest for the loan given for 50 days. To ensure that people take their credit guidelines seriously, high interest rates are in place for people that do not pay on time. Also, a 20% default rate is itself a proof and justification of the risk involved for the bank. Hence, these cards can be a win-win opportunity for all, if used diligently by the customer.
