“Magic” credit cards (Part Two)

For a long time, I’ve wondered what mechanism was funding the “magic” of Frequent Flier miles or the 1, 2 or even 3% refunds so many credit cards offer Americans. I have always assumed this gift from heaven isn't being paid by "deadbeat" like me who pay their credit card in full each month, but by "suckers" who can't never pay their credit card balance in full (called revolving balance holders). 

This is absolutely correct if we also include interchange fees charged to merchants and sometimes annual fees. In clear, this means that people who carry debt and merchants indirectly subsidize the perks enjoyed by “deadbeats” who pay in full. True, credit card rewards, whether it’s cash back, points, or frequent flier miles aren’t magic. 

They’re financed through a few key revenue streams starting with credit revolvers, these cardholders who carry a balance month to month and pay interest, often between 15 to 25% interest, generating massive revenue for issuers. In 2025, approximately 45% of American credit card holders pay their balance in full each month, while 60% carry a balance and pay interest. Only 9% pay off “as much as they can” while 13% only make the minimum payment. 

This means that less than half of Americans use credit cards without paying interest, while the majority contribute to the revenue stream that funds rewards programs, bank profits, and cardholder perks. My Visa and American interest start respectively at 19 and 20% with a ceiling of 27 and 29%. As I always thought, these usury rates constitute the main revenues for banks. There’s of course the merchant a fee (1.5 to 3% for each transaction) to the card network (Visa, Mastercard, etc.). 

Premium cards like American Express with high rewards often charge annual fees that are in the $95 to $695 range or more. Late fees, foreign transaction fees, and cash advance charges also contribute. Finally, there are the Frequent Flyer Miles that constitute a special case, as Airlines sell miles to banks in bulk, generally at 1–2 cents per mile. In turn the credit card issuer offer these miles as rewards, and airlines profit upfront as redemption costs vary and airlines benefit from breakage (unused miles) and loyalty-driven spending. 

No need to say that these rewards programs benefit higher-income users disproportionately as they distort pricing and encourage debt among vulnerable consumers. In closing, my disciplined use of credit cards is rewarded, but the system is unfairly funded by those who pay interest and by merchants who pass costs onto all consumers. It’s a clever ecosystem, but not without its moral and economic quirks.