How Do Credit Card Companies Make Money?

If you’re like most of us, you probably use your credit card to make the vast majority of your purchases, and you may be wondering, how do credit card companies make money from the use of your credit card? We will answer this question in much detail below.

How Do Credit Card Companies Make Money?

Credit card companies primarily make money from credit card fees and interest charged to the cardholder, as well as from merchants and businesses in the form of fees charged to them to process payments. That said, let’s dive deeper into the definition of a credit card company to better understand how credit card companies make their money.

There are two types of entities that fall under the definition of a credit card company: Credit card issuers and credit card networks. Both are considered credit card companies but perform different tasks. We will now discuss these two types of credit companies in more detail and how each of them makes money.

Credit Card Issuers

Card issuers are financial institutions that offer consumers credit cards and the ability to borrow money using such cards. Card issuers are responsible for offering credit cards, vetting those who apply for them, distributing the cards, deciding the terms of such cards, and managing the cards once they’re in the hands of the consumer.

In the United States, there are a ton of card issuer, here are some of the major card issuers:

  • Bank of America
  • Wells Fargo
  • Chase
  • American Express
  • Citi Bank
  • Discover
  • U.S Bank

Credit Card Networks

Credit Card Networks are financial institutions that make credit card transactions between businesses and card issuers possible. Credit card networks perform this vital function by facilitating the terminals and providing the technology required for a merchant to accept payments from a consumer using a credit card.

Some of the major credit card issuers are also credit card networks. These card issuers include American Express and Discover. Bank of America and Wells Fargo, for example, are only card issuers, meaning they do not act as credit card networks as does American Express, which issues credit cards and facilitates payments between merchants and card issuers.

Branded Credit Cards

Some card issuers have partnered with other businesses to provide a credit card that offers cardholders exclusive benefits from those businesses. If you look around the internet for credit cards, you will a ton of branded credit cards.

For Example, Bank of American, a card issuer, has, for example, partnered with Air France to provide its customers with a Branded Credit Card names the Air France KLM World Elite Mastercard. This credit card provides benefits that are specific to Air France KLM. For example, you get 3 miles for every $1 spent on Air France and KLM flights, and you get 5,000 miles every year that you can for flights to almost any destination around the world.

Let’s Dive Deeper Into How Credit Card Companies Make Money From Card Holders

As previously mentioned, credit companies make money by charging card holders fees, as well as interest on any balances that they may carry.

Credit Card Fees

It will come to you as no surprise that many credit card issuers make money from the fees that they charge their cardholders. These fees include the following: annual fees, late fees, cash advance fees, and balance transfer fees. Let’s dive deeper into each one of these fees.

Annual Fees

Many card issuers charge cardholders annual fees to make money. For example, credit cards that offer excellent rewards often come with an annual fee that ranges anywhere from $85 to $495. Card issuers who offer rewards credit cards charge annual fees to recoup some of the expenses involved in providing the rewards and benefits associated with the credit card. Also, some cards that are offered to those with bad credit also charge annual fees to compensate the lender for lending to a person who poses a higher risk of nonpayment.

Cash Advance Fees

If you’ve ever taken a cash advance using your credit card, you probably know how expensive they can be. If you’re not familiar with cash advance fees, credit card issuers charge them whenever a person uses his or her credit card to withdraw cash from his credit line. Card issuers typically charge 3% to 5% of the transaction amount with a minimum cash advance fee of $10. For example, if you were to withdraw $1,000 from your credit card, your card issuer will charge you anywhere between $30 to $50 for such withdrawal. This is one that credit card companies make money.

Balance Transfer Fees

Balance transfer fees are charged whenever a person transfers balance from one credit card to another. Usually, card issuers charge 3% to 5% of the amount transferred from one credit card to another. Some card issuers offer an introductory period where they waive the balance transfer fee and any interest on the balance transferred.

Late Payment Fees

Almost all credit card issuers charge cardholders a late fee if the cardholder fails to make the monthly minimum payment due on the account. That said, if you have a credit card, you should always at least make the minimum payment because not only will you be charged a late fee, your credit score will suffer when the late payment is reported to the credit reporting bureaus.

Over The Limit Fees

In some situations, a card issuer will allow a cardholder to make purchases that exceed his or her credit limit. When a person makes a purchase that puts him over his credit limit, some banks will charge them what is known as an over the limit fee. For example, if you have a $2,000 credit limit, and you make a purchase for $2,350, you have gone over your credit limit. Some card issuers will allow such a purchase even though it exceeds your credit limit, but they may charge you what is known as over the limit fee for going over your credit limit. This is another way that credit card companies make money.

Interest

Credit card issuers make the bulk of their money from the interest that they charge cardholders to borrow money on their credit cards. Whenever you make purchases on your credit card that you do not pay off by the due date, interest begins to accrue on your credit card balance. This is how credit card companies make the bulk of their money. That said, if you want to reduce the amount of money that credit card companies make, all you have to do is pay off your balance by your payment due date. If you don’t leave a balance on your credit card, you will not be charged interest.

Let’s Dive Deeper Into How Credit Card Companies Make Money From Merchants & Businesses

Again, credit card networks fall under the umbrella of credit card companies. Credit card networks facilitate the payment from your card issuer to the merchant or business you’ve purchased a product or service from.

Credit card networks make their money by charging merchants and businesses a fee for each transaction as well as a percentage of the purchase that usually ranges from 1% to 3.5% of the transaction amount. For example, if you were to buy a $10 book, the credit card network will charge the store you bought it from may charge the merchant 3% ($0.30) for processing the transaction. Of course, the amount charged is different from one card network to another.

Sale of Your Information

The final way that credit card companies make money is through the sale of your personal information. Usually, when you open an account, you’re agreeing to allow your card issuer to sell your information to third parties unless you expressly state that you don’t want your information to be sold. Rarely do people opt out of the sale of their information and so credit card companies make money this way.

How to Save Money While Using Your Credit Card?

There are a few actions that you can take when using your credit card to save money and reduce the amount of money that credit card companies can make from you. For example, if you pay your account balance in full by your payment due date, you can avoid paying any interest on the use of your credit card. Also, by making your payment on time by your due date, you will avoid paying late fees on the account. A great way to ensure that you’re never late on your credit card payment is to set aside some money so that you always have enough cash on hand to at least make the minimum payment on your account.

When choosing a credit card that offers rewards and comes with an annual fee, you should calculate whether you’ll earn enough money from the rewards so that your rewards earning exceed the annual fee on your credit card. This is another way to save money.

That said, keep in mind that if you earn money from rewards, but keep a balance on your credit card, the credit card company will be able to recoup the value of the points you’ve acquired by charging you high interest fees on your credit card balance. So, the best way to ensure that you save money is to always pay your credit card balance in full.

Keep in mind that credit card companies make the bulk of their profit from interest charged on your account balance.

Bottom Line

The bottom line is that credit card companies make a ton of money from both cardholders and merchants. They make money from cardholders by charging them interest on their debt, as well as charging them miscellaneous fees. They make money from merchants by charging them a fee for every transaction that they process. In the event that you’re paying an annual fee on your credit card, you should use your credit card smartly to earn enough rewards to make your annual payment worth it. We’re not encouraging you to spend more, but merely to spend smarter. For example, if your credit card offers you 5% on gas for a given month, you should use that card for your gasoline purchases to maximize your rewards.

Credit Score Planet Frequently Asked Questions

1. Do credit card companies make money even if you pay in full?

Although credit card companies make the bulk of their money by charging cardholders interest on their credit card balance, if you pay in full, you will drastically reduce the amount of money those card issuers will make from you. However, credit card companies make money through other means, such as charging cardholder fees. Also, some credit card companies make money from merchants whenever through a fee that’s charged to merchants every time you make a transaction.

2. How much money do credit card companies per year?

Credit card companies make hundreds of billions of dollars per year. For example, in 2016, credit card companies made $163 billion from cardholders.

3. How do Visa and Mastercard make money?

MasterCard and Visa make money by charging merchants who accept payments that are branded with visa and MasterCard a fee based on the transaction amount.

4. How much money do credit card companies make from each transaction?

Typically, this amount is different from one transaction to another. Usually, merchants pay a small fee per transaction + a percentage of the transaction amount. For example, a merchant could be charged $0.15 per transaction + 2.5% per transaction. So, the answer really depends on the amount of the transaction. For example, if you make a $100 purchase, the credit card company would make $0.15+$2.50= $2.65. Note: This is just an example, different merchants pay different amounts.

5. Do credit card companies make money when you pay in full?

When you pay in full, you reduce the amount of money that a credit card company can make from you. However, the reality is that most people leave a balance on their credit card, and so credit card companies still make a ton of money from interest charged on account balances.