How Do Credit Card Companies Make Money?

By Kapil Dwivedi
  | Published: 22 August 2020 | Last Updated On: 12 February 2021

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It is definitely no secret that credit card companies actually make a lot of money. But have you ever found yourself wondering how they actually do that? Credit card companies make most of their money from three major things: interest, transaction fee, and the fee charged to the individual cardholders.

Another thing that many of you might or might not be aware of is that it is not just cardholders who have to pay some amount to use credit cards, even the merchants have to pay for the privilege of accepting credit cards.

Stay tuned and read ahead to find out more about how the credit card providers make money and how you, as a cardholder, can minimize the number of your funds that contribute to these financial gains.

How Credit Card Companies Work

The general broad term “credit card companies” typically includes two types of companies: issuers and networks.          

Issuers

These are banks as well as credit unions that issue the various credit cards. When you, as a cardholder, make use of a credit card, you are typically borrowing funds from the card issuer. The retail credit cards in the market that generally come with the name of a store, fuel company, or other merchants are issued under a contract by a bank with the retailer. Therefore, these cards are referred to as co-branded credit cards.

Networks

These are the companies that process the various credit card transactions that occur. The major networks all across the globe are MasterCard, Visa, American Express, along with some others. Companies such as American Express are both issuers as well as networks.

When a credit card is used, the funds move electronically via numerous hands, from the issuers, via the networks, to finally the bank of the merchant. The network also helps in ensuring that the transaction taking place is attributed to the right cardholder (i.e. you) so that your issuer can then charge you for it.

Where Does The Money Come From?

The moneymaking formula of your credit card company has quite some attributes to that equation. The main parts of this equation are you, i.e. the cardholder, and the merchant you shop with.

Interest

A major part of the revenue of the mass-market credit card companies is contributed by the interest payments. However, interest payments can be avoided. The credit card issuers in the market only charge interest when a cardholder carries a balance from one month to another. So, if you can manage to pay your balance in full each month, you will not have to bear any interest charges on your credit card.

Fees

The subprime issuers in the market, those are the ones that specialize in the card seekers have typically bad credit, generally earn much more from the fee and charges as opposed to the interest charged. Also, the mass-market credit card providers charge a lot of fees as well, however, a large part of them are avoidable. The major fees charged include the following:

  • Annual Fee: Annual fees are generally charged on those credit cards that come with high reward rates along with cards for the credit card seekers that do not have such a great credit score.
  • Cash Advance Fees: This is the fees charged by the credit card issuer when a cardholder makes use of his or her credit card to obtain cash at an ATM facility. Generally, there is a percentage charged on the amount of cash withdrawn, with a minimum amount set.
  • Balance Transfer Fees: When you transfer your outstanding dues from a credit card to another one in order to obtain a lower rate of interest, you are generally applicable to pay a fee. Some cards might waive off this fee for a fixed introductory period.
  • Late Payment Fees: If a cardholder is unable to pay the minimum monthly payment amount by the due date, he or she will be charged a late fee. Some cards might waive off this fee or not have it at all.

Interchange

Every time you swipe your credit card at a shop, the merchant is applicable to a processing fee which is generally a fixed percentage of the transaction. This part of the payment that is sent to the issuer through the network is referred to as the interchange. These fees are fixed by the networks and can vary depending on the volume of the transactions as well as their values.

Here’s how A Cardholder Can Cut the Costs

If it weren’t for cardholders such as you, the credit card companies would not be making any money at all. However, the good news here is that you can actually limit the amount of money that a provider earns from you. Some tips to avoid extra costs are:

  1. Paying your outstanding dues for every month in full to avoid any interest being charged.
  2. Making use of the electronic alerts so that you can get notified when your payment is due and can avoid any late payment fees.
  3. Keeping some money aside as an emergency fund so that you do not have to resort to liquidity options such as cash advance.
  4. Opting for a card that does not have the balance transfer fee, even if it is for the introductory period.
  5. Bearing an annual fee of the card only if the rewards offered on the card will weigh out the costs. Always keep in mind that the rewards and welcome bonuses might add to your pocket, but the fees and interest on the card can burden it even more.