Credit Cards

[jaybird201]

I was looking at interchange fees for Visa Signature and American Exprses credit cards today...just to see if the Schwab/Fidelity rewards programs are subsidized by the brokerages, or if the interchange is high enough so that FIA can still make a profit despite paying out such high cash back percentages.

I can see how Fidelity can give 2% back on their AmEx rewards card since they have higher interchange fees than the industry average, but how can Schwab give 2% back on Visa Signatures when the interchange sits just slightly above 2%?

Just wondering if it's a bait and switch or if the 2% rate is gonna be around for awhile.

PS. Another thought -- maybe the fact that interest rates are so low is a contributing factor. Since technically a credit card purchase is a 30- to 60-day interest-free loan from the credit card company to you, maybe the lowered cost of lending that money out is reducing their costs. If so, as interest rates rise, rewards returns would go down.

Thoughts? 

[athensguy]

I would guess that the 2% I'm getting on the Schwab card is subsidized by Schwab because it means I have to keep a brokerage account with them and they hope to make money on trades.

[jaybird201]

I'd definitely agree that it's a relationship product, though I'm not sure that requiring a brokerage/checking account means it's subsidized.

Now that they've got the lowest index fund expense ratios of any brokerage out there (0.09% w/ no load and no transaction fees), it's not that expensive to have a brokerage with them.

[thrasher865]

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jaybird201 wrote:

PS. Another thought -- maybe the fact that interest rates are so low is a contributing factor. Since technically a credit card purchase is a 30- to 60-day interest-free loan from the credit card company to you, maybe the lowered cost of lending that money out is reducing their costs. If so, as interest rates rise, rewards returns would go down.

Thoughts? 

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I'd say their profits aren't tied as much to the national rate, because as it goes up, the rates they earn on those consumers carrying balances on their cards go up at the same rate.  Do you really think the CCCs make money on PIFers?  The transaction fees they charge merchants just keep them from losing money on people like us.  The real profit to the CCCs is in the people that have thousands of dollars in revolving debt with them.

So I wouldn't think that rewards would go down as the prime interest rate rises. 

[jaybird201]

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thrasher865 wrote:

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jaybird201 wrote:

PS. Another thought -- maybe the fact that interest rates are so low is a contributing factor. Since technically a credit card purchase is a 30- to 60-day interest-free loan from the credit card company to you, maybe the lowered cost of lending that money out is reducing their costs. If so, as interest rates rise, rewards returns would go down.

Thoughts? 

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I'd say their profits aren't tied as much to the national rate, because as it goes up, the rates they earn on those consumers carrying balances on their cards go up at the same rate.  Do you really think the CCCs make money on PIFers?  The transaction fees they charge merchants just keep them from losing money on people like us.  The real profit to the CCCs is in the people that have thousands of dollars in revolving debt with them.

So I wouldn't think that rewards would go down as the prime interest rate rises. 

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Good point. I'd agree that the 2% rewards attracts many more people that don't PIF each month than do.

Hopefully other credit cards will be introduced to compete with the Schwab and Fidelity rewards programs, making it difficult for the 2% rewards rate to be lowered.

Message Edited by jaybird201 on 06-30-2009 09:13 AM

[scorerise]

What about all the ads in the monthly statements? They have to be charging something for them.

[haulingthescoreup]

Just a comment: wow, how things have changed! A year ago, posters were sneering at 2% rewards. Just goes to show, the CCC's can give, and the CCC's can take away.

I really wanted a Chase Freedom Plus, too.

[athensguy]

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haulingthescoreup wrote:
Just a comment: wow, how things have changed! A year ago, posters were sneering at 2% rewards. Just goes to show, the CCC's can give, and the CCC's can take away.

I really wanted a Chase Freedom Plus, too.

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The Freedom Plus is only 1% on "other". I mix my Schwab card with Driver's Edge, BP, and Discover More to get some pretty good overall rewards.

[haulingthescoreup]

But it used to be better than that, no? That was the whole point.

Thank goodness, PenFed is still hanging in there.

[athensguy]

Freedom Plus was 3% with a cap on your top 6 categories then 1% on anything not in the top 6 categories. A $30 annual fee and $250 check for $200 in rewards. I think that it's still that for now if you already have one.

2% on "other" is relatively new and is the highest cash back there has been. Penfed is 1.25% on other, which used to be high. There was the Fidelity at 1.5% and the Blue Cash was good if you spend 5 figures at grocery and pharmacy. Also Driver's Edge is up to 2% back on "other" and up to 6% on Gas, Grocery, and Pharmacy.

I use Schwab for other (it's deposited every month) and Driver's Edge for bonus categories along with Discover if there's a bonus I like. The rest just get used sometimes to hopefully keep them alive.