How can banks afford to offer credit card rewards?
There are 3 entities in a credit card transaction; Typically when you swipe for 100, the merchant only gets around 97.5. The 2.5 is divided amongst the 3 entities, roughly around 0.5 for the Merchant Bank, around 0.5 for the Card Network and a lions share to Issuing Bank of around 1.5 The reason Issuing Bank gets large share is because they take the risk and provide the credit to customer. Typically the Issuing Bank would pay the Merchant bank via the Card Network the money in couple of days. So the Merchant Bank is not out of funds. The Issuing Bank on the other hand would have given you a credit of say 10 to 50 days depending on when you made the transaction and when the payment is due. On an average 30 days of credit. So roughly the Acquiring Bank is lending money at the rate of 18%. It is from this money the Issuing Bank would give out rewards, which is typically less than 1%. Also in cases where say Merchant Bank and the Issuing Bank are same, Bank would make money on both the legs of transaction and hence launch co-branded cards with better rewards. The above numbers are illustrative and actual practices vary from Bank to Bank to card Network to Country Related question at How do credit card companies make profit? One reason why some merchants in the US don't accept Discover is that the fee the store is charged is higher than the average. Generally a portion of transaction fee for the network and the issuing bank goes to the rewards program. In some cases a portion of the interest can also be used to fund these programs. Some cards will give you more points when you carry a balance from one month to the next. Therefore encouraging consumers to have interest charges. This portion of the program will be funded from the interest charges. Profits: Rewards: Some rewards are almost always redeemed: cash once the amount of charges gets above a minimum threshold. Some are almost never redeemed: miles with high requirements and tough blackout periods.  Credit cards that don't understand how their customers will use their cards can run into problems. If they offer a great rewards program that encourages use, but pays too high a percentage of points earned can lead to problems. This is especially true when a great percentage of users pay in full each month. This hurt Citibank in the 1990's. They had a card with no annual fee forever, and a very high percentage never had to pay interest. People flocked to the card, and kept it as an emergency card, because they knew it would never have a annual fee. The banks don't have to pay for credit card rewards. The merchants end up footing the bill. The merchants that accept credit cards pay from 2-4% in fees on the credit card purchase. Those fees go to support the rewards programs. The merchants also take on most of the risk during a credit card transaction (although the credit card companies would have you believe otherwise).  If a thief uses a stolen card to purchase a camera from Mike's Camera Shop for instance, any funds the merchant received will be taken away from the merchant. In addition, the merchant will be hit with a chargeback fee (usually around $20-$60). Finally, since the card was stolen, the merchant will never get their merchandise returned, so Mike's Camera is out the camera as well. No camera, no funds, and a $60 fee to boot. The credit card issuers make $60 on the chargeback fees and have no liability. Michael Pryor's answer is accurate to the actual question asked. The current accepted answer from Dheer is not entirely true but roughly provides an overview of the different entities involved in a typical transaction, with some wrong terminologies, corrected and improved below.  The issuing bank, the one that issues the credit card to the customer. When it comes to the service fee split, the issuer bank takes on the majority of the cut in the service fee paid by the merchant to the different entities. For example, on a 2.5% overall fee paid by merchant, roughly 1.5% goes to the issuer, 0.3% goes to the card network (visa, master card, etc) and the remaining 0.7% goes to the acquiring bank. Reward programs have a partnership with participating merchants, where merchants are charged a higher service fee, for the likelihood of driving a higher volume of transactions to the merchant. A portion of the rewards also comes from the issuer, who shares a percentage of their fee back to the customer, in exchange for the same likelihood of making more profit through increased volume in total transactions. For example, a reward program may charge merchants 4.5% fee, with 3.5% of it going to the issuer. Upto 3% of this can be given back to the customer for their loyalty in using the card service. The banks can afford to take as little as 0.5% instead of their regular 1.5% due to the increased volume of transactions and the fixed fee they collect as membership fee. Note that costco has a similar business plan, but they make money entirely of membership fee. So with enough clients, banks can theoretically afford to run their program entirely on membership fees, costing no additional service fee to merchants. The service fee depicted above is arbitrary, and it can be lowered if the merchant is also a client of the issuing bank, that is, both the issuing bank and acquiring bank are the same. So it is kind of a win-win-win situation. And as usual, the banks can afford to make a larger income, if the customer ends up paying interest for their credit - although the rewards program is not designed accounting on this.
I would say generally, the answer is No.   There might be some short term relief to people in certain situations, but generally speaking you sign a contract to borrow money and you are responsible to pay.  This is why home loans offer better terms then auto loans, and auto loans better than credit cards or things like furniture.  The better terms offer less risk to the lender because there are assets that can be repossessed.  Homes retain values better than autos, autos better than furniture, and credit cards are not secured at all. People are not as helpless as your question suggests.  Sure a person might lose their high paying job, but could they still make a mortgage payment if they worked really hard at it?  This might mean taking several part time jobs.  Now if a person buys a home that has a very large mortgage payment this might not be possible.  However, wise people don't buy every bit of house they can afford.   People should also be wise about the kinds of mortgages they use to buy a home.  Many people lost their homes due to missing a payment on their interest only loan.  Penalty rates and fees jacked up their payment, that was way beyond their means.  If they had a fixed rate loan the chance to catch up would have not been impossible. Perhaps an injury might prevent a person from working.  This is why long term disability insurance is a must for most people.  You can buy quite a bit of coverage for not very much money. Typical US households have quite a bit of debt.  Car payments, phone payments, and either a mortgage or rent, and of course credit cards.  If income is drastically reduced making all of those payments becomes next to impossible.  Which one gets paid first.  Just this last week, I attempted to help a client in just this situation.  They foolishly chose to pay the credit card first, and were going to pay the house payment last (if there was anything left over).  There wasn't, and they are risking eviction (renters).     People finding themselves in crisis, generally do a poor job of paying the most important things first.  Basic food first, housing and utilities second, etc...  Let the credit card slip if need be no matter how often one is threatened by creditors.  They do this to maintain their credit score, how foolish. I feel like you have a sense of bondage associated with debt.  It is there and real despite many people noticing it.  There is also the fact that compounding interest is working against you and with your labor you are enriching the bank.  This is a great reason to have the goal of living a debt free life.  I can tell you it is quite liberating. Most banks offer a college card that has low limits so you can start building credit. Another good option is to get a rewards credit card and do your everyday spending on it, then immediately turn around and pay it. I have seen people that just overpay their credit card just to use it like a debit card, all while earning credit and getting rewarded for it.  I work for a bank so I see this alot. In the case of reward cards, different cards may offer different rewards for different kind of purchases. For example, in the UK, one of the Amex cards offers 1.25% cashback on all purchases, whereas one of the Santander cards offers 3% on fuel, 2% or 1% on certain other transactions, and nothing on others. Of course, you then have to remember to use the right card! Another reason is that a person may use a card for a while, build up a good credit limit, and then move to a different card (perhaps because it has better rewards, or a lower interest rate, etc) without cancelling the first. If it costs nothing to keep the first card, then it can be useful to have it as a spare. Credit cards are a basic building block of a stable financial plan.  By using a credit card for every purchase above, say, the price of a coffee you gain a number of material benefits.  You get the free use of the bank's money for about a month.  You reduce the amount of cash you require to almost nothing.  You get a handy budget tracking tool as many credit cards help you assign categories to expenses.  You can typically download your transactions and import them into a budget app for handy record keeping.  Many cards offer benefits such as extended warranties on items purchased, travel insurance, reward points and other benefits. There is only one caveat: Pay the entire balance, in full, every month, on or before the due date.  Don't even THINK about paying anything less and don't EVER be late. "Banks often offer cash to people who open savings accounts in order to drive new business. Their gain is pretty much as you think, to grow their asset base. A survey released in 2008 by UK-based Age Concern declared that only 16% of the British population have ever switched their banks‚ while 45% of marriages now end in divorce.  Yip, till death do most part. In the US, similar analysis is pointing to a decline in people moving banks from the typical rate of 15% annually. If people are unwilling to change banks then how much more difficult for online brokers to get customers to switch? TD Ameritrade is offering you 30 days commission-free and some cash (0.2% - 0.4% depending on the funds you invest).  Most people - especially those who use the opportunity to buy and hold - won't make much money for them, but it only takes a few more aggressive traders for them to gain overall. For financial institutions the question is straightforward: how much must they pay you to overcome your switching cost of changing institutions?  If that number is sufficiently smaller than what they feel they can make in profits on having your business then they will pay. EDIT TO ELABORATE: The mechanism by which any financial institution makes money by offering cash to customers is essentially one of the ""law of large numbers"".  If all you did is transfer in, say, $100,000, buy an ETF within the 30-day window (or any of the ongoing commission-free ones) and hold, then sell after a few years, they will probably lose money on you.  I imagine they expect that on a large number of people taking advantage of this offer.   Credit card companies are no different.  More than half of people pay their monthly credit balance without incurring any interest charges. They get 30 days of credit for free.  Everyone else makes the company a fortune. TD Ameritrade's fees are quite comprehensive outside of this special offer.  Besides transactional commissions, their value-added services include subscription fees, administration fees, transaction fees, a few extra-special value-added services and, then, when you wish to cash out and realise your returns, an outbound transfer fee. However, you're a captured market.  Since most people won't change their online brokers any more often than they'd change their bank, TD Ameritrade will be looking to offer you all sorts of new services and take commission on all of it. At most they spend $500-$600 to get you as a customer, or, to get you to transfer a lot more cash into their funds.  And they get to keep you for how long?  Ten years, maybe more?  You think they might be able to sell you a few big-ticket items in the interim? Maybe interest you in some subscription service? This isn't grocery shopping.  They can afford to think long-term." "Credit Unions turn a profit by lending money at a higher interest rate than their savings do, just like banks do. It is an amoral feat, completely parallel to any moral weights you have assigned to ""the system"". If the most favorable circumstance is you receiving access to capital, then you can easily achieve that with zero reservations about the system that granted it to you." Set up a meeting with the bank that handles your business checking account. Go there in person and bring your business statements: profit and loss, balance sheet, and a spreadsheet showing your historical cash flow. The goal is to get your banker to understand your business and your needs and also for you to be on a first-name basis with your banker for an ongoing business relationship. Tell them you want to establish credit and you want a credit card account with $x as the limit. Your banker might be able to help push your application through even with your credit history. Even if you can't get the limit you want, you'll be on your way and can meet again with your banker in 6 or 12 months. Once your credit is re-established you'll be able to shop around and apply for other rewards cards. One day you might want a line of credit or a business loan. Establishing a relationship with your banker ahead of time will make that process easier if and when the time comes. Continue to meet with him or her at least annually, and bring updated financial statements each time. If nothing else, this process will help you analyze your business, so the process itself is useful even if nothing comes of it immediately. The key is that you need to use your debit card to earn the higher interest rate. The bank can offer a higher interest rate on accounts connected with a debit card because: They earn additional income through debit card fees charged towards account holders, among other things. They offer the higher interest rate specifically to encourage people to use their debit cards. By offering a joint checking/savings account that requires you to use your debit card, the bank is assuming that you'll keep more money in your account than you would in a standard checking-only account. Your higher balance translates into more money the bank can loan out or invest, which usually leads to higher profit for them. Businesses pay fees to the bank to accept debit cards. These fees represent another source of profit for the bank. The more you use your debit card, the more the bank earns in fees, so the bank encourages you to use your debit card more frequently through incentives like a higher interest rate or waiving fees on your account if you use your card enough. Plus, since it's likely that an individual who maintains a fairly high balance in an account linked to a debit card is going to spend more (simply because they can spend more), banks will sometimes waive fees on the consumer side for balances over a certain amount.