How Do Credit Card Companies Make Money?

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Credit card companies often spend immense amounts of money to keep their operations running well. These companies will hire people to maintain their websites and customer service departments. They work towards producing new cards and monitoring accounts. They especially spend extensive amounts of money on advertising each year. Statista reports that Capital One spends about $400 million in advertising each year, while Discover spends about $270 million. American Express, Citibank, and Chase also spend tens of millions to promote themselves each year.


Even with all that, credit card companies can still make an immense profit. R.K. Hammer and The Ascent write that credit card companies collected more than $160 billion from people in 2016.


So how do credit card companies make money? Let’s look at some of the ways how they can get a profit and how you could end up paying more with your card than you might expect, especially if you don’t consider the fine print with some cards.



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How Credit Card Companies Make Money: 8 Ways

Interest Rates

The most prominent way how credit card companies can make money comes from interest rates. The interest income a card company acquires comes from people who have revolving balances on their cards. You will be charged interest if you do not pay off your credit card debt in full before the necessary deadline. The amount you will pay will vary surrounding how much you owe and the current interest rate on the card.


The interest a person pays entails the card’s periodic rate multiplied by the average balance one has each day. and the days in that billing period. The rate is the annual percentage rate divided by 365. Value Penguin reports that the average interest rate for a card in the United States is 19.33%.


U.S. News and World Report states that the APRs for credit cards can vary surrounding the type of reward associated with a card, the general type of card, and one’s credit rating. A person with a bad credit rating could get a card with an APR from 20 to 23%, while someone with excellent credit could attain a card with a rate as low as 14.5%. APR values may also be higher for store-specific credit cards than general purchase-based cards that focus on airline, travel, or hotel rewards.


One interesting part about interest rates is that some card companies tend to collect more interest per customer than others. The Value Penguin report from earlier cites that Capital One, Barclays, and Discover all get about $170 to $200 in interest per account on average, but American Express collects around $37 per account. The value suggests that American Express cardholders tend to pay off their cards sooner, while people with other cards might not be as likely to do this.


Some card companies may feature an intro APR. The APR will be a reduced total and will last for a few months after someone receives a card. The intro APR may be appealing, but it can quickly rise to its regular value after a bit. Take note of the terms and conditions of whatever card interests you before applying, and be sure the card you want has a sensible APR you are comfortable with or is something you can afford.


Interchange Rates or Merchant Fees

You’re not the only one who can pay a credit card company money, as these providers can also make money from interchange rates. These are also called merchant fees, as the merchants that will process these cards will have to pay for the privilege to handle them.


The interchange rate is a fee a merchant pays to process credit or debit card transactions. A card provider will charge this fee to offset the credit risk associated with a transaction. The fee covers any possible issues surrounding returns, fraud, or other concerns when processing a deal.


As Merchant Maverick reports, a merchant account provider will collect interchange rates from a retailer, but that provider will pay those fees to the bank or other entity that issued the initial card. The account provider does charge a markup, plus the credit card provider will charge a small network fee for facilitating the deal.


Merchant Maverick also says that interchange rates are often around 1.5% to 2.1% in value. The rate may also include an additional 10 to 25 cents for each transaction to go alongside that earlier percentage.


An interesting part about these merchant fees is that some card companies charge more than others. Value Penguin reports that about 15% of Capital One’s average annual income comes from merchant fees. Meanwhile, nearly a third of what American Express earns comes from those merchant fees. Points like these often make it tough for some retailers to accept American Express cards, as the high merchant fees might not be worth it for some of them.


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Annual Fees

Annual fees are a revenue source that comes from credit card companies charge cardholders for access to cards. Providers charge annual fees to reduce the risks of giving cards to people with weak credit ratings. These fees may also offset some of the expenses associated with whatever rewards they provide.


Annual fees can be worth about $25 to $50 on average. Many card companies have millions of active accounts, meaning those annual fees will produce significant revenues.


You might notice one of these fees after a full year of using a card. You might not be billed an annual fee during your first year of using a card, although the rules will vary by provider. Some providers may also charge monthly fees.


The Consumer Financial Protection Bureau says that as of 2016, most people with high credit scores pay annual fees on their cards. Those with lower credit scores aren’t as likely, as about a third of them pay these fees.


Cash Advance Fees

One convenient part of credit cards is that people can use them to get cash from their local ATMs. But those who withdraw funds from an ATM will be subject to cash advance fees. The charge comes from processing the card and recording the withdrawal data.


NerdWallet writes that cash advance fees range from 2% to 5% on average. Cardholders are also subject to fee minimums. A person might pay a minimum cash advance fee of $5, meaning that person would have to pay that value even if the total withdrawal would entail a fee of less than that amount.


Balance Transfer Fees

Another fee to note entails the balance transfer charge. You can transfer the debt from one card to another to pay it off with a lower interest rate. But in doing this, you will be charged a fee of about 3% to 5% of whatever amount is being transferred.


Some card companies may waive their balance transfer fees for a brief period. You could potentially avoid paying these fees if you can pay the entire transferred balance within that timeframe.


Late Fees

Late fees are charged when people don’t process their minimum credit card payments by certain deadlines. The Balance reports that card companies have limits on what they can charge for late fees. Companies can charge up to $29 for the first late payment or up to $40 when one is late more than once in the last six months. Some companies may waive these fees on occasion. But no matter what happens, a cardholder’s credit score will be hurt due to the late payment.


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Foreign Exchange Transactions

People can use their credit cards worldwide, but they would pay extra for the privilege of doing so. A person who travels outside one’s home country and uses a credit card in another country may be charged a foreign exchange fee. The fee may be about 3% of the value of the purchase. The charge is to offset the expense associated with transferring money from one currency to another.


Cashback Rewards

Credit card companies can also make money from cashback programs. Cardholders can earn cashback on qualifying purchases with their cards in some cases. While this sounds like a way for card companies to lose money, they actually make more off of these offers.


Investopedia writes that credit card companies often encourage people to pay for things with their credit cards by giving them cashback offers they wouldn’t receive through other transactions. But in doing this, it becomes easier for the card providers to collect revenue from interest payments. These card companies will also collect money from merchant fees, what with a person using one’s card more often. Cards with more generous cashback offers may also feature higher annual fees and interest rates.


A Final Note

Credit card companies can easily make money from customers and various retailers through all these measures. Be sure to watch what you’re getting into when applying for a card, as a company will do plenty of things to try and get more money from you. You could end up paying more than expected if you don’t read the fine print and manage your spending habits.’


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