My Credit Card Pays Better Interest than My Bank!

Here is an odd realization.  My credit card actually gives me a better interest rate than my bank.

“How can that be?” the crowd will scream.  Everyone is always complaining about high interest rates on credit cards.  They currently average around 16.1% and some are much higher!  Not only that, but if you make a minimum payment or even a partial payment, the interest applies not only to what is left after the payment, but to the entire amount you owed them before the payment.  It takes many years to pay off a credit card if you pay just the minimum, even if you never use it again.  Typical advice from financial advisors and planners is to pay off your highest interest debt first, and that is invariably credit card debt.

This high interest seems like a scheme for banks to make more money, but it is partially due to the need to cover the risk they face when lending money, which a credit card is.  Some of those people will default on their debt and never pay them back.  The default rate on credit cards is up this year, but usually hovers around 3%.  That’s 3% of people who walk away from their debt leaving the banks holding the bag.  They charge the high-risk people more because they are more likely to default, but they charge everyone else more (except for those low, teaser introductory offers to get you hooked) to make sure they have collected enough to cover their losses.  As I’ve written elsewhere, businesses and governments really have only one source of money:  our wallets.  We all end up paying the price for bailing out the deadbeats.

Given all that information, what I’m saying about getting interest from the credit card company doesn’t seem to make sense.

But I’m not talking about the interest consumers have to pay.  I’m talking about the interest the credit cards pay us in the form of those cash back bonuses.  Discover pays 1% on all purchases (with some 5% quarterly specials) and a Capital One card advertises 1%,  2% on groceries and 3% on dining.  So here is the catch; when I pay off my credit card in full every month I get a cash bonus for every dollar I have spent and I pay them no interest.

When I look at a typical bank savings account I find an interest rate of 0.1% at Chase, for example, (or 0.4% for a Premier Account with monthly fees and/or monthly limits unless the balance is over $15,000).  So for practical purposes, the Discover credit card pays me 10 times as much for the money I spend each month as the bank would pay me if I let them keep my money for a year (assuming I did not have to pay any extra fees).

I know it’s not a pure comparison, money spent is clearly not the same as money saved, but the contrast is still interesting.  The credit cards don't pay me interest for lending them my money.  They pay me to borrow their money hoping I will end up paying them more in interest in return - but I don't!  It’s a curious result from some creative critical thinking.