I have a Discover Card, which these days I only use to make purchases that fall under one of their periodic “Cashback Bonus” categories with the 5% refund. (I have another credit card that has a higher cashback percentage than the ordinary Discover Card Cashback percentage, but not as high as the 5% bonus percentage.) So, beginning in a couple of days, if I charge anything at any restaurants, I’ll use the Discover Card; but gas stations and grocery stores will start going back on the other card.
I always pay off all my credit card charges in full every month, and there is no annual fee on my account. Also, when I build up the cashback balance to $50, I just take the money–I never use it to go shopping at one of their partner retailers or anything like that.
So, I’m just idly curious, am I a thorn in the side of the Discover Card company? Is some analyst (or computer program) eventually going to notice my spending patterns, and then they’ll send goons around to break my legs–or at least cancel my account (or change its terms of service–“In order to better serve you, we have upgraded your account to our special Plutonium Level, which allows you to receive extra airline miles from all participating partners*! *Participating partners include Air Waziristan, Crazy Eddie’s Cropdusting Service and Discount Airline, the People’s Liberation Army Air Force, and Eastern Airlines, in the event that somebody ever starts up Eastern Airlines again. Also, we will begin implementing an annual fee of one million dollars on your Discover Card Account. If you do not wish to accept these changes, then buh-bye!”). I don’t care all that much–it’s my oldest credit card account, so as I understand these things, closing it would negatively affect my credit rating; but since I’m not actually looking to borrow money from anyone right now, I don’t really care about that either.
Nonetheless, I’d like to know if I need to be on the lookout for Discover Card ninjas or anything like that.
I’m pretty ignorant as to how credit cards work- don’t you have to pay interest on everything you charge to credit regardless of whether you pay the bill on time or not? Forgive me if I’m wrong.
No. Many cards are interest free if you the pay the entire bill on time. Most cards get a percentage of sales from the merchant though so they make money regardless.
Sure, but the interchange fee is only around 2%, usually. MEBuckner is getting 5% back on the purchases he puts on that card.
One other thing to consider is that Discover is not as widely-accepted as Visa or MasterCard. Having more people using their cards will drive up demand for merchants to accept their cards, a net win for Discover.
If they have set up their system to allow an intelligent person to game it to his advantage, I feel you are morally obligated to take them for everything you can.
Even if it turns out they lose a little money on you, most people don’t pay off their credit card every month and they can charge them a high interest rate that makes up for whatever they lose on you. I’m surprised they haven’t added an annual fee since that usually drives customers like you to a different (“free”) card.
One of the things Discover counts on are cases where people intend to make money on the system (as the OP does), and yet don’t for whatever reason - maybe they charge up too much one month, or maybe they lose their job, have their car explode, need surgery, etc. In any event, they count on some of those regular monthly payers to eventually get stuck paying 20-30% interest. Once people get stuck paying interest, they’re likely to be doing it for years, and it only takes one to offset many of the OP’s type.
It’s a little like how the casino can afford to pay out a few jackpots on their slot machines, knowing that they’ll still take in a net profit.
For a long while, every bank in town was offering me $50 or $100 to open an account. I would open a simple no-fee checking account with a minimum balance for the minimum duration, after which I would immediately close my account, taking my profit with me. I don’t see how a bank could do that and not lose money on me.
So it’s possible Discover is just doing the same thing, spending money on a promotion to get more customers and maybe report an increase in accounts this quarter.
As far as credit cards, Chase is also offering me 5% cash back. I prefer them to Discover because it’s a regular Visa so I don’t have to hunt for merchants who accept Discover.
Also, in the past Discover would require me to ramp up to a full 1% cash back reward. So the first $X amount was only earning 0.25%, then 0.5%, then 0.75%. And each year, it reset back to 0.25%. Are they still pulling that crap?
If so, that could forestall some of the losses against customers like the OP.
Many rewards credit cards are set up with incentives so that it you use them optimally, the bank will lose money on you. As someone already mentioned, they are set up this way because most people don’t. The card issuers’ biggest challenge is to get you to use the card. Once a group of people start using it, most will use it on things other than just the “5%” (or whatever it is) specials. Some will not pay their balances in full and incur interest charges. And some will pay late or go over their limits and incur fees.
Discover is probably losing a bit of money on you, but they probably don’t care that much.
My hats off to MEBuckner, he is cheaper than me. I always use the Discover card, always pay on time, and enjoy the savings, including the bonuses.
I suspect they are losing money on him, but not on me, for the most part. I’d guess that the reason for the promotion is first, that people see it and think 5% even if they don’t bother to go on line and sign up, and second, to get the Discover card on top of your wallet.
BTW, what are better cashback/no fee cards? We have other rewards cards, but the mostly pay off in annoying things like visa gift cards and credit for junk I’m not interested in buying.
The one I’ve got pays 1.4%–but that depends on me keeping a sufficient balance in a “high-yield” savings account. That account is basically the bulk of my “6 months spending money for emergencies” fund; it is not, of course, “high yield” at all (I think the account itself is getting 1% interest) but with the cashback credit card linked to it, it has a higher effective yield than any other savings account I can find.
If I didn’t have that one Mastercard, I’d use the Discover Card much more than I do.
Gus is correct. It gets passed on to the merchants. Joey is also correct. When the merchants feel the bite from reward cards, they raise prices. The net effect is that people who use the reward cards are being subsidized by people who don’t.
FYI, here’s an article from the New York Times arguing that rewards credit card users are subsidized by those who do not have such cards and ultimately the poor. Also, here and here (warning: PDF) are academic papers on the subject.
