Credit cards have become an integral part of modern life, with the average American household holding approximately 4 credit cards. In fact, the total credit debt in the US by the third quarter of 2023 was $1.13 trillion. This shows just how much Americans have embraced the use of credit cards.
But have you ever wondered how credit card issuers actually generate profits? Yes, they charge you interest on your balances.
But is that their only source of income? Of course not!
There are several ways through which credit card companies make money. And this article is intended to unravel just that. This way, you can understand how your credit card issuer or networks make money.
So, to start, let’s understand some crucial facts:
What are Credit Card Companies?
Credit card issuers fall into two primary categories – the issuers and the networks. Both work together to ensure that you get the best services from your credit card.
Issuers
A credit card issuer is the company that issues the card, usually a bank or credit union. The name of the issuer will be on the card, for example, Barclays, Chase, Capital One, Citi, Wells Fargo, etc. These are the institutions or companies that fund your credit card.
Usually, these companies charge interest on their cards, with each company having different rates. Also, the issuer will set the terms and conditions of the card. For example, who can qualify for the card, how much credit limit you can get, and how much interest is charged on balances or cash advances.
In other words, issuing companies handle approving applications, providing customer service, billing statements, and collecting payments and interest
Networks
Now, to the Networks. These are the companies that facilitate the transactions between the card issuer and the sellers or merchants.
For instance, you have a credit limit of $500 from Capital One, and you want to buy a product from Amazon; how does the money move from Capital One to the Amazon account? That’s where the credit card networks come in.
Network companies have networks that allow the sending and receiving of money. They enable money transactions between the bank, cardholder, and the merchant. The credit issuers are the link.
As for their compensation, they charge an interchange fee. Some of the main credit card networks in the US include Visa and MasterCard, which are purely networks.
Discover and American Express are also networks, but they double as issuers. Depending on the type of network on your card, you can shop in some outlets and not others.
Top Ways Credit Card Companies Make Money
So, how do credit card companies make their money? Well, there are four primary ways that credit card issuers generate profits from cardholders:
Interest
This is the biggest revenue generator, with issuers collecting interest on carried balances that are not paid off monthly. Interest accrues daily based on your average daily balance and APR. The higher the interest rate and balance you carry, the more interest income for issuers.
Different cards from the same or different issuers attract different interest rates. For example, while Chase Freedom Unlimited offers an APR of 20.49%-29.24%, the Citi Simplicity® Card credit card has an APR of 19.24%-29.99%.
Fees
Credit card companies generate sizable revenue from the numerous fees charged to consumers. These include annual membership fees just for holding the card, balance transfer fees for moving debt from another card, cash advance fees on ATM withdrawals, and foreign transaction fees on overseas purchases.
Different credit cards have varying fees for different activities. You can find all this information in the terms and conditions of the card you wish to acquire.
Penalties
There are also some penalties that you might incur on the card. For instance, late payment fees for missing due dates, returned payment fees when checks bounce, and over-limit fees if you exceed your credit limit.
All these incremental fees add up, often totaling to a substantial amount of money annually per cardholder. However, by minimizing fee-triggering activities, consumers can reduce this lucrative fee income issuers receive.
Interchange
Credit card networks earn money from interchange fees and transaction processing charges paid by merchants whenever a credit card purchase is made. Usually, these average between 1% and 3% of the transaction amount.
How Much Money Do Credit Card Companies Make?
Credit card lending is an extremely profitable multi-billion-dollar industry. Here are some numbers that demonstrate just how lucrative this business is:
In 2023, total outstanding revolving consumer credit card debt reached over $1 trillion, according to Federal Reserve data. On the other hand, the average credit card interest rate currently hovers around 24%, enabling issuers to rake in interest income from carrying balances.
In 2022, CFPB found out that credit companies earned around $105 billion from interest rates. On the other hand, they earned over $25 billion in fees.
Now, this is a good amount of money. While you might not notice how much your credit card costs you, these figures might help you get that picture.
How Can You Lower Your Credit Card Costs?
To reduce how much credit card companies profit from you, you can implement basic financial habits like:
One, pay your balances in full each month to avoid interest charges. This helps you avoid the annual APR.
You can also avoid late payments that lead to penalty fees. This can be achieved by setting up autopay or reminders.
Pick cards with no annual fees or cards where the rewards exceed the annual fee cost. This helps to cancel the amount charged as fees.
Next, minimize fees by not making cash advances or international transactions. And where possible, request waivers for annual fees or penalty fees.
Lastly, you can negotiate lower interest rates by requesting rate reductions or balance transfers. However, this is mostly possible if you have an excellent credit score.
Conclusion
Generally, credit card issuers employ various methods to generate immense profits from consumers. Raking in interest on carried balances and charging numerous fees are their primary money making tactics.
Maximizing these revenue streams enables credit card lending to be a multi-billion dollar industry. However savvy consumers can fight back by paying balances off monthly, avoiding late payments and fees, requesting waivers, and negotiating lower rates.
With smart financial habits, you can minimize the profits credit card companies earn from you. Don’t let issuers take more money than necessary – take control of your credit card costs.
