How do Credit Card Companies Make Money?

A credit card is a thin rectangular piece of plastic or metal issued by a financial company, that lets cardholders borrow funds to pay for goods and services of their choice. Credit cards allow you to make purchases of all sizes, while also offering you additional benefits, in the form of rewards and building-up credit. 

However, credit cards are not without cost. You might pay interest and fees on this borrowed money. As a result, credit card companies make the largest share of their money from three things: interest, fees charged to cardholders, and transaction fees paid by businesses that accept their credit cards. It is therefore important to use credit cards appropriately and responsibly so that you can get the most out of your card, while also paying the least amount of fees.

Types of credit card companies

Credit card companies can be further broken down into two categories: issuers and networks.

• Issuers are banks and credit unions that issue credit cards, such as Chase, Citi, Capital One, or Bank of America. When you use your credit card, you are borrowing money directly from the card issuer. There are also co-branded credit cards that bear the name of a store or other merchant and are issued by a bank. 
• Networks are companies that process these credit card transactions. In the U.S., the major credit card networks are Visa, Mastercard, and American Express. It is important to note that American Express is unique in that it is both a network and an issuer. 

How credit card companies make money

Credit card companies make the bulk of their money off of you, in the form of interest and fees, and off of the merchants, who accept your credit cards as a form of payment.

The majority of revenue for credit card issuers comes from interest payments. These issuers charge interest when you carry a balance from month to month, meaning that this cost is avoidable. As long as you pay your balance in full, then you will pay no interest to the card issuer.

The revenue doesn’t end there. Issuers also earn a sizable amount of money from fees. These fees include:

• Annual fees, which are fees charged annually to cardholders in order to keep the account open. Annual fees are often the highest on cards with the most benefits, as well as cards for people with subpar credit.
• Balance transfer fees, which are fees charged to cardholders when you transfer debt from one credit card to another. Cardholders often do this in order to get a lower interest rate on their debt. Issuers usually charge a fee of 3-5% of the amount transferred, but some specific cards come with no fee or waive the fee for a specific period of time.
• Cash advance fees, which are fees that issuers charge when customers use their credit card to get cash from an ATM. Usually, issuers will charge 2-5% of the amount of cash taken out.
• Late fees, which are fees charged to cardholders for failing to pay the minimum amount by the due date. On top of the late fee, your credit score will also drop if you pay late.

Credit card companies also earn revenue from processing fees charged to merchants. Every time you use a credit card, the merchant is responsible for paying a percentage of the transaction, which is usually 1-3%. This payment that is sent from the merchant to the issuer is called interchange. These fees are set by payment networks and vary based on the volume and size of these transactions.

Largest credit card companies

Trillions of dollars worth of transactions are conducted with credit cards every year. According to The Nilson Report, these are the biggest U.S. credit card issuers by purchase volume in 2018, processing over $3 trillion worth of purchases and payments:

Ways to keep your costs low

As we have shown, credit card companies have various ways of making money, and you, the cardholder, are at the center. However, there are ways to limit how much these companies make off of you, while also reaping in the benefits that come with a credit card.

It is most important to get the card that suits your needs the best. When considering a new credit card, closely examine the fees, as well as the benefits, to make sure that this credit card will only boost your credit while also allowing you to make the purchases that you need and want to make. If a card comes with a slew of benefits, but a very high annual fee, evaluate whether that is right for you, and if not, it may be prudent to sacrifice some rewards to also minimize costs. Always remember to pay off your balance in full every month to avoid interest fees. Try to avoid cards with balance fees if possible. And finally, stay on top of your finances by avoiding late fees at all costs, and set aside money in an emergency fund to avoid other costly options like cash advances. Credit cards can be a great way to build up credit and can offer great rewards and sign-up bonuses, but it is important to remember that fees and interest charges can leave you with little wiggle room. Make sure that you set and follow a budget in order to take control of your finances and maintain financial independence.

Conclusion

Credit card companies are some of the biggest companies in the world. They earn most of their revenue from interest, fees charged to cardholders, and transaction fees paid by businesses that accept credit cards. Staying on top of your finances and using credit cards responsibly is the best way to minimize the amount of money that credit card companies make off of you.