How card companies profit from people who pay in full

HostI always thought I was the perfect customer for my credit card company because I pay my bill in full every single month. I never pay a cent in interest, and I get all those travel points for free. But I just found out that inside the industry, they have a special name for people like me, and it's not a compliment.

GuestIt's a bit of a shock when you first hear it, but people who pay their balance off every month are actually called deadbeats in the credit card world. To a bank, a good customer is someone who carries a debt and pays them interest every month. If you pay in full, you're technically a deadbeat because they're not making any money off you through interest. But here is the thing. Even if you never pay them a dime in interest, these companies are still making a lot of money from your spending. They have built a system where they get paid every time you use that piece of plastic, whether you carry a debt or not.

HostHow are they getting paid if I'm the one getting the points and the free travel? It feels like I'm the one winning that deal.

GuestIt feels that way because you don't see the money changing hands. The main way they make money from you is through something called swipe fees. Every single time you tap your card or put it in a machine, the shop where you're buying something has to pay a fee. It's usually between one and three percent of whatever you just bought. That fee gets split up between your bank, the network like Visa or Mastercard, and the bank the shop uses. So, if you go out and spend a hundred dollars on a nice dinner, the bank might take two or three dollars right off the top. If you use your card for your entire life—your food, your gas, your clothes—the bank is taking a small cut of your whole lifestyle.

HostBut that fee is being paid by the shop, not by me. So I'm still getting a free ride, right?

GuestWell, not really. Most shops just raise their prices across the board to cover those fees. So you're likely paying that two percent extra on everything you buy anyway. But for the bank, a person who spends a lot of money but pays it off is still a gold mine. They're getting a steady stream of these small cuts without any of the risk that comes with a person who might not pay them back.

HostOkay, but what about the cards that give you huge rewards? I have a card that gives me free hotel stays and flights, and they even give me money back for my gym membership. Surely they're losing money on me once you add all that up.

GuestThat's where the premium model comes in. To get those big perks, you usually have to pay a yearly fee. Some of those fees are around a hundred dollars, but the fancy ones can be nearly seven hundred dollars a year. The bank is betting that the fee you pay will be more than what it actually costs them to give you those points or the fancy lounge at the airport. They also know that most people won't use every single perk they offer. For the bank, that yearly fee is pure, guaranteed profit that hits their books on day one. They're selling you a sense of status, and you're paying them for the right to use their card.

HostI guess I never thought about that yearly fee as a way to make up for the points. But even with that, it feels like they're doing a lot of work just to get a few dollars here and there. Is that really enough to keep a giant bank happy?

GuestThere's a much bigger prize they're after, and that's your data. When you use your card for everything, you're giving the bank a very clear map of your life. They know where you shop, what kind of car you drive, where you go on vacation, and how much you earn. This kind of data is worth a fortune. They use it to figure out what other things they can sell you. If they see you're spending a lot at home repair shops, they might send you an offer for a home loan. If they see you have a lot of money in the bank but you're paying for a wedding, they might try to get you to sign up for their wealth management services. They use the credit card as a way to get you into their world and keep you there so they can sell you much bigger, more profitable things later on.

HostThat sounds like they're watching my every move just to wait for a chance to sell me something else. It feels a bit cold.

GuestIt's a business, and they're playing a very long game. They also know that even the most careful person can have a bad month. They look at a deadbeat—someone who pays in full—as the safest possible person to lend money to. They know you have the money and you're responsible. But they also know that life happens. A car breaks down, or someone loses a job, or there's a big medical bill. The moment you can't pay that bill in full, you become a revolver. That's their word for someone who carries a balance. Suddenly, that twenty percent interest rate kicks in. They're essentially paying for the chance to be the one you owe money to when things go wrong.

HostSo they're not just making money on my daily coffee or my yearly fee. They're waiting for me to trip up so they can finally charge me that high interest.

GuestThey're betting on the fact that over ten or twenty years, most people will have at least one or two moments where they can't pay it all back. When that happens, the bank makes back everything they spent on your points and more. You're a low-risk target for them. They would rather have a hundred people who pay in full and might one day carry a balance than a hundred people who are already struggling to pay and might go broke.

HostThe bank sees my responsible habits not as a sign that I'm a good customer to help, but as a sign that I'm a safe bet for a future debt.

GuestThe card in your wallet is a map of your life today and a bridge to the interest they hope to collect from you tomorrow.

HostIt's strange to think that by being a deadbeat and staying out of debt, I'm actually the most valuable player in their long-term game.

GuestThat's exactly it.

HostI'll definitely be thinking about those swipe fees next time I'm at the store. One or two cents from my pocket might not seem like much, but when you multiply that by every single thing I buy, it's clear the bank is doing just fine without my interest.