How Do Credit Card Companies Make Money?

Credit cards offer lucrative awards to people who know how to use them, but are they losing money on the deal?

You’re the kind of person who loves rewards credit cards and never pays a penny in interest. How do credit cards make money off of someone like you? In fact, you must be costing the company money because of all the rewards it has to pay out!

The truth is actually just the opposite. There are a lot of ways that credit card companies make money that don’t involve charging interest.

If you’re wondering how the big credit card companies bring billions in revenue each year, read on.

Interchange (Swipe) Fees

Interchange fees are a big way that credit card companies make money and the one that regular consumers are least aware of.

Every time you use your credit card to make a purchase, the card issuing company makes money from what is called an interchange or swipe fee. These fees are intended to help the card issuer pay for the cost of maintaining the systems that enable stores to accept credit cards.

Swipe fees are usually a percentage plus a flat amount of each transaction. The fees vary widely by card issuer, the type of card, how many transactions that the store accepting the card processes each month, as well as the type of business that is accepting the card payments.

MasterCard, for example, charges supermarkets 1.48% + 10 cents on every transaction made using a Core or Enhanced Value MasterCard. If the purchase is made using a World Elite MasterCard, that fee climbs to 1.9% + 10 cents per transaction.

One of the reasons that American Express cards aren’t as widely accepted as Visa or MasterCard cards is that American Express charges higher interchange fees. Interchange fees on American Express cards can be as high as 3.5% of every transaction.

In general, as the value of the card to the consumer in the form of rewards or other benefits increases, the swipe fees that merchants have to pay increase.

You’ll never see notice these fees since they’re paid by the store rather than by you, but they’re one way that credit card companies make money on rewards cards, even from consumers who pay their bill in full each month.

Consumer Paid Fees

Many credit cards have fees that cardholders have to pay. One of the best known and most common is the annual fee.

Premium rewards cards often charge annual fees between $100 and $500. These fees help offset the valuable benefits, such as companion passes on airplane trips and concierge service. If the cardholder doesn’t make extensive use of these benefits, the card issuing company comes out ahead.

Other fees that cardholders can incur include foreign transaction fees, late payment fees, balance transfer fees, and cash advance fees. These fees can easily cost you hundreds of dollars if you’re not careful and they’re an important source of revenue for card issuers.

Discount Offers

While it might be counter-intuitive, credit card companies can also make money by offering discounts on certain products to their customers. One example of this is American Express’ Amex Offers benefit.

With Amex Offers, cardholders can add discount offers to their card, such as spend $75 at Rebook and get $15 back. If the cardholder spends the requisite amount, they’ll get a statement credit at the end of the month.

Most of the time, credit card companies don’t fund these deals out of their own pocket. Instead, the companies that offer discounts pay the card companies to make these offers as a form of marketing.

Every time a consumer qualifies for the discount, the card company gets paid by the business offering the discount.

Interest

Interest is the best known and the main way that credit card companies make money. Everyone knows that it’s a bad idea to carry credit card debt, but some people still do. With interest rates as high as 20% per year, carrying even a small balance on your card can mean big interest payments.

As of December 2016, Americans carried a total of $747 billion in credit card debt. At a generously low 10% interest rate, that would generate more than $74 billion in revenue for credit card companies annually from interest payments alone.

Paying off your statement balance every month can help you avoid contribution to the growing amount of credit card debt in the United States.If you have existing credit card debt, you can consider using a balance transfer offer to pay it off faster.

Most credit card companies will allow you to transfer your debt to a different card, for a fee. As a way to drum up business, many cards have balance transfer promotions, waiving the fee and the interest for new cardholders. By transferring your balance to a card with a 0% promotion, you can go from paying 20% interest or more to paying no interest at all, greatly accelerating your payoff schedule.

You view a list of cards offering a 0% APR balance transfer offer here.

You might think your credit card rewards are costing card issuers, but don’t be concerned about your card getting taken away if you never pay interest. Credit card companies have a variety of ways they can make money from consumers.

 

Photo Credit: cafecredit Holding credit card via photopin (license)

TJ Porter

TJ Porter has been sharing his financial expertise through his writing since 2014. He graduated with a degree in business from Northeastern University in 2016. In his spare time, TJ enjoys esports, cooking, and board games.

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