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It's a way around the truth in lending laws,* to make interest rates appear lower than they are.

Instead of 2% cash back for some, they could just add 20 percentage points or so to the interest rates of everyone else. If you think this is unfair, you're really just saying that interest rates are applied unfairly. But it doesn't sound like that's your actual thought process. Is everyone who pays higher rates subsidizing those who pay lower? How do you know?

*This is not my original idea, but something I read somewhere.






That’s not really how credit cards work though. You only ever pay credit card interest if you carry a balance from month to month. Cash back doesn’t just reduce your effective interest rate; your effective interest rate can already be zero simply by virtue of paying the full balance due every month. And the credit system does literally nothing to discourage this behavior; in fact, the credit scoring algorithms incentivize it.

The money for cash back comes from transaction fees. It would have to. People go out of their way to find ways of maximizing their return from these kinds of systems so any cash back scheme that could be too easily gamed would fall prey to these people. That actually happened once, albeit to a “merchant”. The US mint used to let you buy $1 coins, online, with a credit card, for $1 each and free shipping. You could literally buy your entire credit limit’s worth of $1 coins, deposit those same exact coins at your local bank branch to pay your credit card bill before it came due, and straight up profit from the cash back.


It's just a shell game. You think it's really different, but to the corporate bean counters the money is fungible.

You pay 2% in transaction fees, you may or may not get almost all of it back as "cash back".

In a world without significant transaction fees, we wouldn't have the grace period either, and the people who get the most cash back would pay lower rates and others higher.

The reason the powers that be like the current system and would lobby against a crackdown on fees is because it feels like they're giving you something with the grace period, and giving you something if you get cash back.

But it's just a play on psychology. If there's an injustice, I think it has to boil down to evaluating credit risk incorrectly.


> It's just a shell game. You think it's really different, but to the corporate bean counters the money is fungible.

Guaranteed per-transaction revenue is not fungible with interest revenue. Interest revenue is extremely discounted by both time value and default risk.

> In a world without significant transaction fees, we wouldn't have the grace period either...

At that point, most of the lower-risk customers who use credit cards would switch to debit cards, credit card interest would probably have to go up due to adverse selection and higher default risk, and credit cards would be a much smaller business overall.




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