I am in search of some insight from my fellow myFicoites. I was talking with a friend the other day and we started talking about the airline points and hotel points. I am usually well versed on the nuances of credit cards but was stumped by one question in particular.
Why do some credit cards offer different amounts of points for different types of purchases? So, for example we were talking about Amex Hilton Hhonors which gives 3 points per dollar on regular purchases but then gives 6 on Grocery, Pharmacy, Gas, etc. I can see the marketing potential of offering some extra bit of bonus on different types of purchases but started to wonder if there was something more to it than that. Are Grocers and Gas Stations paying a higher rate than other types of stores which make the extra points possible? Again, the marketing bit is powerful but is that all there is to it? Hey, 5% on gas made me open a bank account with FKFCU and then take their credit card. Any insight on this topic would be appreciated.
I would think because most people use there cards at gas, grocery stores and restaurants they are wanting consumers to use there cards at those places and no one elses card because if you get used to using just one card you may use it everywhere
"Grocery" interchange rates are actually lower than your average retail rate.
Two reasons I can think of why they would offer the larger bonus on grocery type categories, despite the lower interchange:
1- Groceries are an "everday" type of purchase. Meaning if you use that card for groceries, you'll carry that card around with you all the time and probably keep it in one of the better slots in your wallet. As opposed to leaving it at home for emergenices. Getting you to carry the card around with you all the time increases the odds you'll use it. Getting you used to using the card for everyday type purchases breaks that psycological barrier many people have with whether a purchase is a "credit card" type of purchase or not. Accessbile card and learned behaviour of using it on everday purchases = more money for the card company.
2- Except for rare exceptions, there is a reasonable upper limit to what people can charge in a grocery category. They effectively get a cap (like Discover puts on their rotating bonus categories) without having to advertise one. It's not easy to abuse the bonus by buying and reselling to churn money and earn rewards. Unless you're doing something like buying food for an entire fire brigade, there is a limit to the number of people your average family feeds and how much they can eat. So the customer thinks it's awesome that they have unlimited bonus rewards on groceries. People get turned off by marketing that has explict limits -- even when that limit is higher than they're likely to reach. Unlimited sounds better.
Grocery interchanges are low to encourage stores to accept them. Card companies needed grocery stores on board to drive growth of their cards for similar reasons to number 1 above.