How do Credit Cards Make Money?

Many people think that credit card companies do not make money if you pay your full credit card bill on time. Thus, wouldn’t credit card companies be losing money considering all of the points, benefits, and protections that they offer? What people seem to forget is that these companies offer a multitude of fees, plus many people do not make their payments on time or fully, resulting in high-interest payments and more money in the pockets of credit card companies.

Interest Payments

Credit cards charge interest on credit card statements that are not paid fully. New credit card offers last year averaged an annual 19% interest rate, meaning that every time your monthly credit card statement was not paid in full, you were charged around 1.5% extra, which went straight to credit card companies. 

What makes interest even more valuable for credit card companies is that they will charge you interest on the entire purchase that has not been completely paid off, not just the balance outstanding. For example, if I make a $1,000 purchase one month, and I only pay $999, I will be charged interest on the entire $1,000 purchase, not just the $1 outstanding.  This means that credit card companies would make $15 off of the $1 I have not paid off if the interest rate was around 18% annually.

Other Fees

Credit cards also offer a variety of other fees: most notably, the annual fee. In 2019, credit card annual fees averaged around $110, which is a notable amount of money if you consider the number of cardholders per credit card company.

Many non-travel credit cards also charge foreign transaction fees of around 3% every time you make a transaction abroad. This means that if you spend $1,000 internationally, credit card companies will receive $30 if the foreign transaction fee is not voided.

Other fees include late fees, if your payment is not made on time, cash advance fees when you pull out money from an ATM, balance transfer fees when you move your debt from one credit card to the next, and over-limit fees if you go over your credit card limit. These are all ways in which your credit card company takes money from you.

Credit card companies also take money from merchants. Most people have encountered places that are cash-only. The reason some stores do not accept credit cards is that they are charged an interchange fee when someone pays with a credit card. Usually, around 2-3% of your credit card purchase will be taken from merchants by credit card companies.

Conclusion

Although you may think that your credit card company is losing money if you pay your bills on time due to the rewards your card offers, you are most likely wrong. Due to the abundance of fees, ranging from annual to foreign transaction, credit card companies have a multitude of ways to earn money. This is why these companies offer incentives and welcome bonuses to entice you to use their card so that they can eventually make money off of you with pesky fees.