How do Credit Card Companies Make Money?
Although the practice of providing large amounts of people with a great deal of unsecured credit is a risky one, banks and credit card companies have made huge profits in recent years by doing exactly this. Various factors can and do affect the scale of profit each year, which is highly dependent on the quality and stability of the economy, the fluidity of the general public and even the time of year, amongst other things.
Christmas, for example, is a great time for the credit card companies. As people prepare for large celebrations with friends and family they tend to spend a lot more money than they actually have saved up. Consequently consumers decide to make more and more purchases on credit in the hope that they can pay their balance off with their January paycheck. When January arrives however, most people aren't able to pay their balance in full, and consequently the credit card companies start levying high rate interest charges, which makes them very, very rich!
Overheads
Of course credit card companies do have expensive overheads of their own to contend with. To run their business, credit card companies must first borrow money from other sources (such as international banks) to enable them to lend credit to their customers. Although the interest rates the credit card companies pay to banks are nothing in comparison to the rates charged to the general public, they still provide a huge cost to the large credit suppliers. Other factors, such as customers defaulting on payments, customers declaring bankruptcy, credit card theft, fraud and even computer error, add further extra costs to credit card companies operations, enabling them to justify passing on such high interest rates and penalty charges to the everyday consumer.
How do Credit Card Companies Make Money?
Interest:Credit card companies charge interest on the credit customers use to make purchases if it isn't repaid within a short period (commonly one month). Interest charges vary a great deal from provider to provider and in the UK and America limits on the interest rates card issuers can charge are uncapped, although natural competition does help to keep rates reasonable, especially for new customers.
Credit card companies take an "iron fist" approach to generating cash-flow from their customers and apply various controvertial methods of raising interest once customers have started using the available credit. For example, "Teaser rates" (lower than normal interest rates offered to attract new customers) no longer apply if customers don't pay their bills on time, and may be replaced by high, penalty interest rates that can even be applied retroactively on owed balances. Some card issuers will charge interest even if the balance has been paid off in full by the due date. This practice is called double cycle billing, and is fortunately becoming less and less common in the industry.
Fees:Credit card companies charge customers fees if minimum monthly repayments are not met, or if credit limits are exceeded. Many critics argue that these fees are extortionately high, but credit card companies argue the extra penalty charges are only levied to cover the extra administrational costs involved. Fees are also charged for use of cards abroad, with exchange rates weighted heavily in the credit card company's favour.
