This blog has a great post on how credit card systems work, and I think it goes a long way to explaining how CC's became so popular in the U.S. in particular:
- Credit cards are a powerful tool that many people do not use correctly. They enable 0% interest loans so long as you pay your balance on time. It's only when you are late on a payment that you pay any interest
- The vast majority of credit card spending is done by people in high income brackets
- Credit card issuers fight to attract those high income bracket spenders. That's because credit card issuers make money on every purchase that's made via interchange fees (effectively a toll paid by merchants). They do this via cashback reward programs.
- It's these interchange fees, not interest penalties, that issuers make most of their money
- The economics of all of this work better in the U.S., because it has more high income spenders compared to other countries
And finally, something that's less well known: the folks at the lower end of the income brackets subsidize all of this. Credit cards, and by extension, their rewards programs, only work when you have enough high income spenders that enable toll collection (interchange fees) from merchants. Merchants respond by raising their average price (subconsciously or otherwise) to compensate. Folks on the high end of the income bracket are able qualify for the lucrative rewards programs. But folks on the lower end cannot.
In effect, the wealthy pay somewhere between 1-2% less on every transaction.
> Credit cards are a powerful tool that many people do not use correctly.
If everybody were "using them correctly", issuers would be bankrupt. The fact that they're not should tell you that there's at least one winner other than the never-balance-carrying cardholders.
> Credit card issuers fight to attract those high income bracket spenders.
Correct, and everybody pays for this (very expensive) fight, one way or another. The fact that some people come out ahead does not make them a good deal in the median case.
> And finally, something that's less well known: the folks at the lower end of the income brackets subsidize all of this.
It would be a lot less money, but issuers would make money off of credit cards even if every single person in the world paid their bill in full every month. They would distinctly not be bankrupt.
They could probably adapt, but they'd have to really streamline their operations. I doubt there would be as many paper ads in the mail, airport lounges, bonus cashback categories etc.
https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...
The highlights in my own words:
- Credit cards are a powerful tool that many people do not use correctly. They enable 0% interest loans so long as you pay your balance on time. It's only when you are late on a payment that you pay any interest
- The vast majority of credit card spending is done by people in high income brackets
- Credit card issuers fight to attract those high income bracket spenders. That's because credit card issuers make money on every purchase that's made via interchange fees (effectively a toll paid by merchants). They do this via cashback reward programs.
- It's these interchange fees, not interest penalties, that issuers make most of their money
- The economics of all of this work better in the U.S., because it has more high income spenders compared to other countries
And finally, something that's less well known: the folks at the lower end of the income brackets subsidize all of this. Credit cards, and by extension, their rewards programs, only work when you have enough high income spenders that enable toll collection (interchange fees) from merchants. Merchants respond by raising their average price (subconsciously or otherwise) to compensate. Folks on the high end of the income bracket are able qualify for the lucrative rewards programs. But folks on the lower end cannot.
In effect, the wealthy pay somewhere between 1-2% less on every transaction.