You also end up spending more, apparently--12 to 20% more.

https://www.youtube.com/watch?v=MFkBoXhl5SU

They keep around customers who operate at losses for them because then they spend more? So they want these customers to operate at even larger losses?

I’m not aware of any card that gives flat out unconditional 5% cash back. You sometimes have these elevated award rates but for very specific merchant partners, limited periods of time, with some cap on the total amount received, or limits on how the reward can be redeemed. The base cash back on reward cards hovers between 1 and 2 percent, even ones with high yearly fees (another area where the margin for the issuer is further elevated). The high yearly fee incentivizes card holders to “get their money’s worth” by using the card more.

Nobody said unconditional. You just rotate the cards in your wallet and use whatever 5% category fits your purchase. You might not do this, but there are people who do, and never pay interest. They clearly operate at a loss for the company year after year. I'm asking why their accounts aren't closed.

Because for every person who signs up and causes them a loss, there’s dozens of others enticed by the same rewards programs who make them a profit. Credit card companies aren’t having any problems being profitable.

I would imagine the number of people who only purchase things that are in the 5% category on their card is extremely small.

> Because for every person who signs up and causes them a loss, there’s dozens of others enticed by the same rewards programs who make them a profit.

That's the answer to the question "why are these cards offered at all", which was not my question.

My question was, "why are even the accounts of people who consistently cause them a loss still kept open?", which this doesn't answer.

I dont understand the confusion, its called a 'loss leader."

These companies have very, very smart people working for them, analyzing all the data they have to come up with a product and its limits. They know x% will not be profitable, and they include that in the profit calculations.

Why dont they simply cut off the non-profitable customers? Because people don't like this and they'll quickly tell their friends "Don't sign up for Discover, they cancel your account if you don't make them money." It wound be all over Slickdeals and blogs. No credit card is going to survive cancelling accounts for using their credit line in totally normal ways.

Just like a store could say "for every 10 sale priced items you buy you must buy a full priced item" - but then nobody would shop there.

It may simply not be legal for them to decide to drop customers just because they are, taken individually, unprofitable.

Think about an all-you-can-eat buffet. Some poor soul is gonna starve themselves so they can splurge and have a "good deal" on a lot of food. Most people will not, and the business would be in trouble otherwise. They still have to serve the patron who's eating a lot, because what kind of buffet would it be if it was "all you can eat, until you're eating so much that we're no longer making enough money"?

Or, some retailers sell items at a very low price, just to get people into the store in hope of them starting to buy more. Nothing stops you from getting into the store, getting the deal on those items and not buying anything else. The store may be losing money on you but they can't stop you from purchasing the item at the advertised price.

People who choose to spend their time and energy chasing deals to hyper-optimize the benefits on their credit card savings are entitled to their savings. Companies (credit cards or otherwise) are just interested in the total outcome of their operations anyway, not on making money off of every single customer. (Besides, even just defining what is a "profitable customer" is a hairy problem.)

1. Because those people who were enticed by that program might no be enticed to sign up in the first place if it says “5% cash back (unless you take advantage of this in which case we cancel your account)”

2. I bet government regulators might be a bit peeved by a company that systematically cancels customer accounts for behavior which is within the advertised terms of the agreement. Usually regulators frown upon luring customers in with an advertisement for a product/service and then purposefully sidestepping said product/service.

3. It’s probably such a small number of customers that’s it’s just not even worth their time.

1. Possible, but seems unlikely as the explanation? How many people would read that fine print and care? So many other contracts already have provisions like this and nobody blinks an eye.

2. It need not be against their terms though? They could easily specify hyper-optimized usage in their agreements as something that might result in account closure. This is already done in a lot of other cases; they could do the same here.

3. I don't know about that. Just look at the sheer number of sites that explain how to maximize your credit card rewards/cash back/bonuses. They wouldn't seem to be there if the audience for them was so vanishingly small?

I’m fairly certain that it is not worth their efforts to cancel those accounts, evidenced by the fact that they either don’t do it, or the number of customers it affects is so vanishingly small that neither of us are aware of the practice.

If you believe so strongly that it is worthwhile for them to do this, then perhaps you have an idea for a lucrative career.

But as long as credit card fraud in the US is measured in billions, I’m going to guess that any manpower which can be assigned there is way more lucrative than any manpower assigned to demonizing their honest customers.

At a guess, stories of people who manage come out ahead pull in a lot of people who don't.

Those merchants likely have a special contract with the card issuer to be a partner with the card issuer. Travel brands lock in repeat brand-loyal customers with mileage rewards. Some of those cards have hundreds of dollars of yearly fees, and the cardholders are spending more overall to negate the impact of the fee. Even so with rotating cards it’s easy to end up in a place where you don’t get your money’s worth or just barely beat the fee. If your card gets you 5% rewards and costs $400 a year, and you come out of the year with $600 in rewards, you’re up $200 overall while the issuer got $400 from you and $300 out of a 2.5% merchant fee, so they’re still up $100. That’s all assuming every one of your purchases was a 5% reward purchase. The issuers margin goes up every time you use their “Shop With CardCo” shopping portal where merchants pay more money to advertise through, or take advantage of other partner deals.

The people churning enough to actually cost the issuer money are extremely rare and there are a lot of people making sure it stays that way.

And then there are folks who get hit with interest and late fees that subsidize the big churners.

>* I'm asking why their accounts aren't closed.*

Because, churners, are a very small portion of the 20B in revenue Visa generated last year, of which it generated a ~50% profit margin.

The system works so well already, why rock the boat by closing the accounts of a few thousand individuals? It would probably cost more to enforce any such rule than they lose in revenue.

> $20B in revenue Visa generated last year, of which it generated a ~50% profit margin.

I was sure this couldn’t be right... but it absolutely is.

https://s1.q4cdn.com/050606653/files/doc_financials/2018/q4/...

Why wouldn’t it be massive? Infinitely scalable business getting a % of each and every transaction at no marginal cost. It’s basically a tax, there isn’t a better business model out there.

They don’t even take any risk lending money, just a % fee for owning the network, that one has to be on to do business with most people with money nowadays.

And by keeping the churners happy, they might recruit some real losers to the platform by word of mouth!

It's closer to 3%, and I don't think there's a way to beat that on the cash back except on a per category basis.

Also, a lot of folks end up carrying a balance in spite of their best intentions.

I suspect this happens relatively often even for folks with a long history of not doing so - e.g. maybe you get fired for the first time and start running up a balance, not long before you've run up some significant interest charges.

It's around 2% https://www.valuepenguin.com/what-credit-card-processing-fee...

And then there's huge credit card bonuses like $150 for Chase Freedom which is like $7.5k of spending's worth...

But again, that doesn't really answer my question. I very much realize lots of people do pay interest. But there are also people who don't, and possibly never have, for many years. I'm asking why do they keep those people around as customers if they're literally losing money on them? To me the obvious answer is they're still bringing value, and the only realistic form that can take as I see it seems to be their transaction data.

It looks like most 5% cash back cards have a hard limit ($1500/quarter seems to be common limit) to the amount you can get back and offer an "unlimited" cash back at a rate at or lower than 2%.

https://www.magnifymoney.com/blog/best-of/10-best-5-cash-bac...

This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases.

> This way they'll make money after the limit takes effect. My assumption is that they are hoping the consumer will forget there's a hard limit to the amount they can save and always go with their "5% cash back card" when making purchases.

And that assumption is exactly what I'm saying isn't universally true. My entire point is there are customers who just rotate cards instead of still using it for lower cash back. Who do this for years. Without racking up any interest. Why do those customers' accounts get kept open?

What I was saying above is that I wouldn't be surprised if a high enough percentage of even the customers who "beat the system" so to speak for many years eventually slip up that it makes up for the rest.

If that's the case, and you can't predict who exactly that subset is going to be, you keep all of them around.

Even a lot of the unlimited 2%-3% cards rate limit you by delaying how often you can pay the bill, so essentially your credit limit limits the amount of reward you can get.

Fun fact: you can pay your US tax return with a credit card for a ~1.5% fee.

The merchants have to pay a percentage.

So, by encouraging the use of credit cards for smaller and smaller transactions, the credit card companies take a bigger and bigger bite from the merchant.

That's all on top of any annual fees and interest charges that the credit card companies hit the customer with.