Updated: Jan 25
When you deposit money in a savings account you are loaning the bank money. They treat your deposit as an investment in their business. They use your money to make more money, primarily by issuing loans which are paid back to them with interest. When you make an investment in a bank you get a return on your money through interest that accrues on your account. Right now my savings account earns .02% interest.
When you swipe a credit card the bank behind that card is loaning you money. They are making an investment in your household with the expectation that they are going to earn a return on their money through interest that accrues on your bill. Credit card interest rates that I found in a ten minute internet search range from 10-25%.
If, at the beginning of the year, you have $1000 in a savings account that earns .02% and you save $100 each month, at the end of the year you will have earned $0.33 in interest.
If, at the beginning of the same year, you have a credit card with a $1000 balance and %10 interest rate and you decide to pay it off by paying $100 each month, at the end of the year you will have paid $49 in interest charges.
Who made more on their investment?