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How Credit Card Companies Make Money

By: Edward Mellett - Updated: 12 Sep 2012 | comments*Discuss
 
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Credit card companies make a lot of money. Every single penny of their profit comes either directly, or indirectly, from consumers, like us, paying for goods and services. Credit card companies charge retailers a small percentage of every transaction made by credit cards, and then charge consumers very high interest fees on money they are borrowing. There are also a sea of other charges, such as late payment, balance transfer and overdraft limit fees which really mount up the money credit card companies make.

Interest Charges

The main way credit card companies make money is by charging consumers who have used their cards interest. Any outstanding balances receive large interest charges each month. If consumers are unable to pay these interest charges on time, then they will be charged further interest charges on these interest charges, as well as late fee charges too!

Credit cards charge very high interest rates on customer’s balances. They charge these high rates for three reasons:

  • The loans are unsecured. This means that unlike other conventional loans (such as mortgages) credit card companies cannot possess your home, or anything else, if you default on your credit card debts.
  • Credit card companies have limited amounts of credit-related, personal information about customers. This raises the statistical risk of customers not paying their debts, and thus firms increase the price of their loans.
  • Credit cards are very popular. Card companies do not need to offer low rate cards – they get customers whatever they charge!

Late Payment Charges

If you pay your credit card bill late, you will be hit with a penalty fee for late payment. Worse, the credit card company may determine that you have borrowed your entire outstanding balance from the time of purchase until the time of payment, eliminating the "grace period" between the moment of purchase and the payment due date. The credit card company can then charge you interest on that balance. Many banks and card companies will raise interest rates if customers pay credit card bills late.

Exceeding Limit Fees

If you charge more to your card than the credit card company has allowed, you may find that the charges go through but you get hit with a penalty fee for exceeding your credit limit. Some credit card companies charge a large fee for exceeding your credit limit, and will keep charging you that fee every month that you remain above the limit.

Balance Transfer Fees

Many credit card companies allow you to move an outstanding balance from one credit card to another card, although they usually charge you a fee.

Cash Withdrawal Fees

Credit card companies encourage you to use your credit card as a cashcard. But if you withdraw cash from a cash machine using a credit card, you'll probably be billed a one-time fee (usually up to £5) in addition to paying interest from the moment you receive the cash.

Annual Card Account Fees

Some credit cards charge an annual fee. They get that money up-front, before you start using the card.

Transaction Fees

Visa and MasterCard charge retailers about 2% to 3% of the value of every transaction billed to their credit cards. American Express charges a little more than other cards because its customers do not "borrow" so much money from them, usually paying off borrowed money instantly.

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