Credit card companies make the bulk of their money from three things: interest, fees charged to cardholders, and transaction fees paid by businesses that accept credit cards.
Use credit cards wisely, and you can minimize the amount of money that credit card companies make off of you.
How credit card companies work
The broad term “credit card companies” includes two kinds of enterprises: issuers and networks.
- Issuers 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’re borrowing money from the issuer. Retail credit cards that bear the name of a store, gas company or other merchant are typically issued by a bank under contract with that retailer. Hence these are often referred to as “co-branded” credit cards.
- Networks are companies that process credit card transactions. The major networks in the U.S. are Visa, Mastercard, American Express and Discover. American Express and Discover are both networks and issuers.
When you use a credit card, money moves electronically through many hands, from the issuer, through the network, to the merchant’s bank. The network also makes sure that the transaction is attributed to the proper cardholder — you — so that your issuer can bill you.
Where the money comes from
You are a key ingredient in a credit card company’s moneymaking recipe, as are the merchants where you use your cards.
The majority of revenue for mass-market credit card issuers comes from interest payments, according to the Consumer Financial Protection Bureau. However, interest is avoidable. Issuers typically charge interest only when you carry a balance from month to month. Pay your balance in full, and you’ll pay no interest.
Subprime issuers — those that specialize in people with bad credit — typically earn more money from fees than interest. Mass-market issuers charge plenty of fees, too, although many of them are avoidable. Major fees include:
- Annual fees. Annual fees are typical on cards with high rewards rates, as well as cards for people with less-than-good credit.
- Cash advance fees. Issuers charge these fees when customers use their credit card to get cash at an ATM. The fees range from 2% to 5% of the amount of cash taken out, often with a minimum dollar amount, such as $5.
- Balance transfer fees. When you transfer debt from one credit card to another to get a lower interest rate, you’ll usually be charged a fee of 3% to 5% of the amount transferred. Some cards don’t charge these fees, or waive them for a certain period of time.
- Late fees. Failing to pay the minimum amount by the due date will usually result in a late fee. Some cards waive the first late fee or don’t charge these fees at all. (Your credit scores, however, can still suffer if you pay late.)
Every time you use a credit card, the merchant pays a processing fee equal to a percentage of the transaction. The portion of that fee sent to the issuer via the payment network is called “interchange,” and is usually about 1% to 3% of the transaction. These fees are set by payment networks and vary based on the volume and value of transactions.
Savvy customers cut their costs
Without cardholders like you, credit card companies don’t make money — but you can limit the amount they make from you. Avoid extra costs by:
- Paying your balance in full every month to avoid interest charges.
- Setting up electronic alerts that notify you when payments are due, so you avoid late fees.
- Setting aside money in an emergency fund to avoid costly options like cash advances.
- Choosing a credit card without balance transfer fees.
- Paying an annual fee only if the rewards you’ll get from the card will exceed the cost. Remember that rewards and sign-up bonuses can put money in your pocket, but card fees and interest can eat right through it.