How Do Credit Card Companies Make Money?

By Randall Orser | Personal Finances

If you think that because you pay off your credit card balance each month your credit card company is not making any money off of you….then think again.

Credit card companies make money in several different ways; from fees including annual fees, interest and transactions paid by businesses that accept credit cards.

Money from Interest:  

The majority of the money made by credit companies comes from interest payments that cardholders make.  If you pay your balance each month then you do not pay interest.  Look for credit cards that offer lower interest rates.

Money from Fees 

Annual Fees:  Annual fees are usually paid for cards with a high rewards rate and those for people with a less than good credit rating.  If you choose a rewards card you need to make sure that the rewards that you will receive each year are higher than the annual fee that you are paying, otherwise the card is probably not worth having and you should go for a card with no annual fee. 

Cash Advance Transaction Fees:  Unless it is an absolute emergency you should not use your credit card for cash advances.  This type of transaction comes with fees, very high interest rates and no grace period.  There is usually a fee if you are use an ATM to withdraw the money ranging from 2% to 5% or a flat fee amount such as $5.

Balance Transfer Fees:  If you transfer a balance from one card to another to get a lower interest rate, then you will usually be charged 3% - 5% of the amount transferred.  

Late Fees:  Not making at least your minimum payment by the due date will earn you a late fee.  If you are continually late it can also earn you a report at the credit bureau.

Foreign Exchange Fees:  If you use your credit card to pay for buy something abroad using your card you are charged a spot rate and an additional percentage usually 2.5%.  To avoid paying these extra fees look for a card that has no fees though they are few and far between.

Interchange Fees:  This is the amount that the merchant pays as a processing fee and it is equal to a percentage of the transaction.  This is called “interchange” and usually accounts for 1% - 3% of the transaction.  The fees are set by the payment network and are usually based on volume and value of transactions.

How you can limit the amount of money that credit card companies make from you:

  • Pay your balance in full each month to avoid interest charges.
  • Make sure you pay your bill on time to avoid late charges
  • Don’t use your credit card for cash advances.
  • Choose a credit card without balance transfer fees.
  • Pay an annual fee only if the rewards are greater than the cost.
Follow

About the Author

President/CEO Number Crunchers® Accounting Inc. Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.