{"id":1857,"date":"2023-11-30T23:43:00","date_gmt":"2023-11-30T23:43:00","guid":{"rendered":"https:\/\/thewealthcircle.com\/?p=1857"},"modified":"2023-12-02T15:53:13","modified_gmt":"2023-12-02T15:53:13","slug":"how-do-credit-card-companies-make-money","status":"publish","type":"post","link":"https:\/\/kiiky.com\/wealth\/how-do-credit-card-companies-make-money\/","title":{"rendered":"How Do Credit Card Companies Make Money | Full Business Model","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n

Every once in a while, you receive small amounts of interest from your credit card company and you jump in excitement. <\/p>\n\n\n\n

Well, that’s a good thing but, have you ever attempted to know how these card companies make money? If you do, you’ll realize that those bonus points you get are not charity offerings. <\/p>\n\n\n\n

Credit card companies make big bulks of money from you and other merchants. As you read through, you will discover various mind-blowing channels through which these card companies make money. <\/p>\n\n\n\n

But, before we dive into that, you must first learn about their full business model. This will help you know how to use your cards wisely. <\/p>\n\n\n\n

How Credit Card Companies Work<\/strong><\/span><\/h2>\n\n\n\n

Credit card companies\u00a0make much of their profits from actual purchases and\u00a0transactions. A 2018\u00a0Federal Reserve System\u00a0report said that “although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have almost always been higher than returns on all commercial bank activities.”<\/p>\n\n\n\n

Credit card companies comprise two different enterprises: issuers and networks.<\/p>\n\n\n\n

Issuers: <\/strong>These are banks and credit unions that issue credit cards, such as Chase, Citi, Synchrony, or PenFed Credit Union. When you use a credit card, you\u2019re borrowing money from the issuer.<\/p>\n\n\n\n

Networks<\/strong><\/strong>: These are companies that process credit card transactions. They include Mastercard, Visa, American Express, and Discover are typically issued by a bank under contract with that retailer and are often referred to as “co-branded” credit cards.<\/p>\n\n\n\n

Card issuers and networks make money in different ways. Networks typically make their money from the merchants, who pay a fee to accept electronic payments from credit cards. <\/p>\n\n\n\n

The issuers make money from the consumer by charging them interest and fees according to their credit card agreements.<\/p>\n\n\n\n

How Credit Card Companies Make Money<\/strong> <\/span><\/h2>\n\n\n\n

Here is a breakdown of how credit card companies make money from cardholders:<\/p>\n\n\n\n

#1. Interest<\/span><\/h3>\n\n\n\n

The majority of revenue for mass-market credit card issuers comes from interest payments, according to the Consumer Financial Protection Bureau. <\/p>\n\n\n\n

When you carry a balance on a credit card, you’re typically charged interest in exchange for being able to borrow the money. <\/p>\n\n\n\n

#2. Annual fees<\/strong><\/span><\/h3>\n\n\n\n

Credit card issuers typically charge annual fees on rewards cards and on cards for bad credit. Depending on the card, annual fees can be pretty costly, especially for cards that offer top-tier rewards.<\/p>\n\n\n\n

The Platinum Card from American Express, for example, charges an annual fee of $550.<\/p>\n\n\n\n

#3. Miscellaneous charges<\/strong><\/span><\/h3>\n\n\n\n

This category includes several potential fees. For starters, the card issuer will charge you a late fee if you don’t pay your bill on time.<\/p>\n\n\n\n

They may also charge you cash advance fees, balance transfer fees, foreign transaction fees for purchases you make outside the U.S., or over-limit fees when you spend beyond your credit limit.<\/p>\n\n\n\n

The fee amounts vary by issuer, but the good news is you may never have to pay these fees if you manage your card well.<\/p>\n\n\n\n

#4. Cash advance fees<\/strong><\/span><\/h3>\n\n\n\n

When you use your credit card to get\u00a0cash, your credit card company charges you with a transaction fee called cash advanced fee.\u00a0<\/p>\n\n\n\n

They\u2019ll also place your transaction into a different bucket on your statement, which typically has a much higher interest rate often over 20 percent.<\/p>\n\n\n\n

Interest rates on cash advances\u00a0are higher than those for purchases and balance transfers. According to CreditCards.com, the average APR for cash advances is 24.8%, compared with an average of 19.84% for purchases.<\/p>\n\n\n\n

#5. Balance transfer fees<\/strong><\/span><\/h3>\n\n\n\n

When you transfer the existing debt to another lender, your credit card company charges you a balance transfer fee. The fee usually ranges from 3 to 5 percent of the total amount transferred. <\/p>\n\n\n\n

#6. Overlimit fees<\/strong><\/span><\/h3>\n\n\n\n

 An over-limit fee is charged when your balance goes over your credit limit. For instance, if your limit is $4,500 and you buy something for $5,000, you\u2019ll be charged an over-limit fee.<\/p>\n\n\n\n

#7. Interchange<\/strong><\/span><\/h3>\n\n\n\n

Interchange is a transaction fee that the merchant’s bank account must pay whenever a customer makes a purchase with a credit card. This is usually a percentage of your total credit card purchase that goes to the credit card issuer and the association that manages the credit card account.<\/p>\n\n\n\n

Related: Can I Buy a Car with a Credit Card? How to Get that Done in Less time<\/a><\/p>\n\n\n\n

How to Avoid the Costs of Using a Credit Card<\/strong><\/span><\/h2>\n\n\n\n

Credit card companies make a large part of their profits from cardholders but, that shouldn’t discourage you from using a credit card. The following ways can help you to limit the amount these companies make from you.<\/p>\n\n\n\n