Credit card companies make the bulk of their money from three things: interest, fees charged to cardholders, and transaction fees paid by businesses that accept credit cards.
Use credit cards wisely, and you can minimize the amount of money that credit card companies make off of you.
» MORE:8 credit card fees and how to avoid them
How credit card companies work
The broad term “credit card companies” includes two kinds of enterprises: issuers and networks.
Issuers are banks and credit unions that issue credit cards, such as Chase, Citi, Synchrony or PenFed Credit Union. When you use a credit card, you’re borrowing money from the issuer. Retail credit cards that bear the name of a store, gas company or other merchant are typically issued by a bank under contract with that retailer. Hence these are often referred to as "co-branded" credit cards.
Networks are companies that process credit card transactions. The major networks in the U.S. are Visa, Mastercard, American Express and Discover. American Express and Discover are both networks and issuers.
» MORE: What makes Discover and American Express different from Visa and Mastercard?
When you use a credit card, money moves electronically through many hands, from the issuer, through the network, to the merchant’s bank. The network also makes sure that the transaction is attributed to the proper cardholder — you — so that your issuer can bill you.
» MORE:How to pick the best credit card for you in 4 easy steps
You are a key ingredient in a credit card company’s moneymaking recipe, as are the merchants where you use your cards.
Interest
The majority of revenue for mass-market credit card issuers comes from interest payments, according to the Consumer Financial Protection Bureau. However, interest is avoidable. Issuers typically charge interest only when you carry a balance from month to month. Pay your balance in full, and you’ll pay no interest.
» MORE:What is a good APR for a credit card?
Fees
Subprime issuers — those that specialize in people with bad credit — typically earn more money from fees than interest. Mass-market issuers charge plenty of fees, too, although many of them are avoidable. Major fees include:
Annual fees. Annual fees are typical on cards with high rewards rates, as well as cards for people with less-than-good credit.
Cash advance fees. Issuers charge these fees when customers use their credit card to get cash at an ATM. The fees range from 2% to 5% of the amount of cash taken out, often with a minimum dollar amount, such as $5.
Balance transfer fees. When you transfer debt from one credit card to another to get a lower interest rate, you’ll usually be charged a fee of 3% to 5% of the amount transferred. Some cards don’t charge these fees, or waive them for a certain period of time.
Late fees. Failing to pay the minimum amount by the due date will usually result in a late fee. Some cards waive the first late fee or don’t charge these fees at all. (Your credit scores, however, can still suffer if you pay late.)
» MORE: It is worth paying an annual fee for a credit card?
Interchange
Every time you use a credit card, the merchant pays a processing fee equal to a percentage of the transaction. The portion of that fee sent to the issuer via the payment network is called “interchange,” and is usually about 1% to 3% of the transaction. These fees are set by payment networks and vary based on the volume and value of transactions.
Interchange fees are at the heart of a heated debate in Congress at the moment. The Credit Card Competition Act aims to introduce more competition among credit card payment networks, which proponents argue will help lower the interchange fees that merchants pay. Opponents of the legislation, however, say that doing so could threaten funding for credit card rewards programs.
Savvy customers cut their costs
Without cardholders like you, credit card companies don’t make money — but you can limit the amount they make from you. Avoid extra costs by:
Paying your balance in full every month to avoid interest charges.
Setting up electronic alerts that notify you when payments are due, so you avoid late fees.
Setting aside money in an emergency fund to avoid costly options like cash advances.
Choosing a credit card without balance transfer fees.
Paying an annual fee only if the rewards you’ll get from the card will exceed the cost. Remember that rewards and sign-up bonuses can put money in your pocket, but card fees and interest can eat right through it.
Here is a list of our partners and here's how we make money. Visit your My NerdWallet Settings page to see all the writers you're following. Credit card companies make the bulk of their money from three things: interest, fees charged to cardholders, and transaction fees paid by businesses that accept credit cards.
Credit card companies generate most of their income through interest charges, cardholder fees and transaction fees paid by businesses that accept credit cards. Even if you don't pay fees or interest, using your credit card generates income for your issuer thanks to interchange — or swipe — fees.
Credit card interest is like a fee you're charged if you don't pay off your entire credit card balance each month. Interest is how credit card companies make a lot of their money.
Introductory low APR rates– One of the most common credit card tricks is to lure new customers in with low APR rates that eventually increase significantly after you've created a purchase history and habit of use. Low interest rates often carry with them hidden fees and high penalties for late payments.
Interest. The majority of revenue for mass-market credit card issuers comes from interest payments, according to the Consumer Financial Protection Bureau. However, interest is avoidable. Issuers typically charge interest only when you carry a balance from month to month.
Even if you don't accrue any interest, the issuer can make money from every card transaction. It does this by charging the merchant an interchange fee. These fees are usually 1% to 3% of the total transaction amount.
Credit card companies earn revenue through interest charges on the outstanding balance when customers do not pay their bills in full each month. Therefore, customers who carry a balance and accrue interest are more profitable for credit card companies.
Credit card companies make money from interest, annual fees, and other charges like late payment fees. 35) What is the difference between an appreciating asset and a depreciating asset? Give examples of both.
In a world where wealth and status are often interlinked, the black credit card stands as a pinnacle of fiscal prestige. Embodied by the illustrious Centurion® Card from American Express, colloquially known as the 'Amex Black Card', these cards are more than a payment method ᅳ they're a statement.
Credit card companies make money in three core ways:
Interest income. When you carry a balance on a credit card — meaning you don't pay off the balance in full by the due date and carry it over to the following statement cycle — you pay interest to the credit card issuers. ...
Credit card companies make money by collecting fees. Out of the various fees, interest charges are the primary source of revenue. When credit card users fail to pay off their bill at the end of the month, the bank is allowed to charge interest on the borrowed amount.
Debt can be good or bad—and part of that depends on how it's used. Generally, debt used to help build wealth or improve a person's financial situation is considered good debt. Generally, financial obligations that are unaffordable or don't offer long-term benefits might be considered bad debt.
Millionaires earn valuable rewards by using credit cards, from paying for groceries to buying clothing. For example, some cards offer 5% cash back on certain purchases, or you could earn points or airline miles that can be redeemed for gift cards or travel.
In crafting strategies to attract new customers, credit card companies employ a variety of offers and incentive techniques that provide tangible benefits. These approaches are designed to entice prospective cardholders with the promise of value through rewards, financial flexibility, or unique brand collaborations.
For merchants, it can be almost impossible to run a business without taking credit cards. However, the fees from these transactions can eat into profits, making it hard for some merchants with a small spread to stay afloat. The average credit card processing fee ranges between 1.5% and 3.5%.
Banks also make money from the interest they earn when they lend money to their clients. The funds they lend come from customer deposits. However, the interest rate paid by banks on the money they borrow is less than the rate charged on the money they lend.
Payment processors make money by receiving a commission. The fee is calculated as a percentage of the transaction between the customer and the merchant and relies on the last one. It also could be a fixed price per transaction.
Key findings. Credit card companies posted $176 billion in income in 2020, down from $178 billion in 2018. Interest fees accounted for $76 billion and interchange fees accounted for $51 billion in 2020. Visa posted $6.13 billion in revenue in the second quarter of 2021.
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