Wouldn’t it be awesome if you were told that you could travel the world, fly in business class, and stay in 5-star hotels without paying a penny? 

Now, guess what, there are people already who have been doing this for years.

How? Well, they do it through credit card rewards and points. Then, how does it work? 

Are the airlines and hotels bearing the cost for these super-smart people or is it just Jeff Bezos acting as Santa Claus?

The actual answer is going to surprise you. So, let’s find out!

Where did it begin?

During the recession of 2008, US banks were barely making any money out of mortgage payments. Therefore, they had to look out for other ways and credit cards seemed to be the perfect choice.

The only way to entice customers into getting these cards was by offering them amazing rewards and points. Hence, the marketing push began.

As it became more and more popular, other countries followed suit.

This popularity has been rising every year with the total number hitting the 100 million mark in India in 2024.

So, since banks are offering these rewards, does it mean that they are the ones bearing the cost?

Well, not really.

You Might Be The One Who’s Paying

Now let’s understand this by breaking down the credit card mechanism:

There are 3 parties involved in the transaction that takes place:

1.) The Consumer aka You

2.) The Vendor 

3.) Credit Card Company

Let’s say you go to a Taj Hotel and you order a glass of wine, pasta and some nice chocolate pudding.

Assuming the total bill comes to about Rs 8,000 and you pay it through your credit card, about 2-3% of this bill amount will be paid by the merchant to the credit card company as merchant fees.

Now, this 2-3% is what the company heavily relies on to pay for your rewards.

Of course, these fees will be different for different credit cards depending if they are basic or premium. For example, a Diners Club card might have a higher interchange fee than a basic ICICI Amazon Credit card.

Of course, it’s natural to assume that merchants don’t like these cards because why should they be paying for your trip to Lakshadweep, right?

So what do they do? Ask you to pay more.

That is exactly why small businesses often ask you to pay 2% extra if you are paying through a credit card.

But, large businesses can’t do that, it takes a serious hit on their reputation. Therefore, they simply increase their overall pricing.

So, this amazing dinner at Taj that cost you Rs 8,000 was Rs 7,000 about a couple of years ago but it’s fair because you are gaining reward points and cash back out of it.

However, let’s say there is another table beside you who paid this Rs 8,000 in debit card or through UPI, then they are paying extra for nothing.

Also Read: Maximize Your Credit Card Points: Top 5 Tips for Optimal Rewards!

Get A Credit Card

Over the years, merchants have raised issues regarding paying high fees over the premium cards due to which banks have responded by cutting down the rewards.

Hence, the system is not flawless but it is how it works.

Also Read: Soon, Digi Yatra may be used for Check-Ins at Hotels, Railways and Monuments

Owing to the numerous credit cards out there, it is tough to understand which is the best for us and certainly, there are some moral concerns regarding how the system works.

However, since the cost of their rewards is embedded in our daily purchases, it makes financial sense to get one even if it’s a basic one else you are just leaving out free points.

Disclaimer: Getting a credit card is a personal choice. The 1% Club suggests doing your research, evaluating your spending habits and then deciding.