While you are busy saving money using credit cards and getting rewards in exchange, credit card companies make lots of money by giving you this privilege at the same time. Now, the question is if you are paying your credits on time and getting rewards as well, how do these companies manage to make money?
Credit card companies make money through several means. Of these, interest fees, annual and other fees charged to cardholders, and transaction fees paid by merchants that accept credit cards are their primary sources of revenue. So, it is not only cardholders but also merchants that contribute toward credit card companies’ profits.
Before heading further, you must know that there are two types of credit card companies: credit card issuers and credit card networks. Banks and credit unions are credit card issuers that issue credit cards and allow consumers to borrow money from them. Credit card networks are companies that process credit card transactions. Let us find out more about how credit card companies make money and earn profits.
1. Interest Charges: Interest is the primary source of revenue for credit card issuers. Credit card issuers charge cardholders with interest fees for carrying a balance on their credit cards, which means the longer they carry their balance, the more interest they will have to pay. Around hundreds of millions of Americans have outstanding credit card debt, credit card companies charge substantial interests for failed payments. However, interest rate or annual percentage rate (APR) is variable and based on your creditworthiness.
2. Annual Fees: Most credit cards come with annual fees, that are different depending on the rewards they offer, for cards with high rewards rates, it may be higher.
3. Cash Advance Fees: Credit card issuers also charge cardholders with a transaction fee for using their credit cards to withdraw cash at an ATM.
4. Balance Transfer Fees: They charge you for transferring a balance from one credit card to another in anticipation of getting a lower interest rate.
5. Late Fees: In case of failing to pay the balance on time, credit card issuers can charge you with a late fee.
6. Foreign Transaction Fees: Credit card issuers charge fees for making purchases abroad.
7. Interchange: Credit card networks charge merchants processing fees equal to a percentage of the transaction you made. As part of the interchange, the payment network sends some portion of that fee to the credit card issuer, while keeping the rest. The interchange fee is set by the payment networks based on the transaction amount and usually ranges between 1% to 3% of the transaction.
Conclusion
It is obvious that credit card companies make a hefty amount of money from cardholders, with contributions from merchants. Simply put, cardholders pay to use credit cards, while merchants pay for accepting credit cards for transactions at their businesses. From the time you purchase a credit card, credit card companies start to make money from it. Though you get rewards for making purchases and paying back on time, credit card issuers set annual fees and offer rewards in such a fashion that they will make a profit. Believe it or not, credit card companies are making money all the time whether you swipe your credit card or not.