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Many people use credit cards for everyday purchases. Read on to learn how credit card issuers turn a profit.
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Many people use credit cards to pay for everyday purchases and earn rewards. If you’ve received a lucrative welcome bonus or have earned credit card rewards, you may wonder how credit card companies can continue to offer incentives like this while also making a profit. Credit card companies make money by charging fees to consumers and merchants.
How credit card companies make money from fees
Like any for-profit business, credit card companies are out to make money. You may be charged fees when you use credit cards. One fee that some credit cards impose is an annual fee. Cardholders agree to pay a yearly fee in exchange for using the card and its benefits.
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It’s worth noting that not all credit cards have annual fees. Credit cards with no annual fees tend to have fewer benefits than cards that do. If you’re looking for a new card and want to pay minimal extra fees, check out our list of the best no annual fee credit cards.
Credit card companies charge consumers other fees besides just an annual one. If you pay your credit card bill late, you’ll pay a late fee. You’ll be charged a cash advance fee if you use your credit card to withdraw cash from an ATM instead of using a debit card to get cash.
If you use your credit card to make international purchases, you’ll be charged foreign transaction fees — unless you use a credit card with no foreign transaction fees. All of these fees add up and impact the wallets of consumers, while making credit card companies richer.
Interest is a big money maker for credit card companies
A big money-maker for credit card companies is interest. When you don’t pay your credit card balance in full, your credit card issuer charges interest. These fees can add up fast. If a cardholder continues to carry a balance, credit card interest accumulates and the debt grows.
Credit card debt is a common struggle for many consumers, and it can negatively impact their personal finances. The average American had $5,221 in outstanding credit card debt in the third quarter of 2021. The good news is you can make strategic decisions to avoid it. Paying your balance off every month is the best move to make if you want to avoid expensive credit card debt.
Merchants also pay up for credit processing fees
Credit card companies also make money by charging merchants fees. Interchange, assessment, and processor fees are fees paid by merchants when you swipe your credit card for a purchase and the payment is processed. These fees go to the credit card issuers and the credit card networks, the companies that process payments.
Research fees and consider your habits
Before applying for a new credit card, make sure you review all of the card details. Ensure you understand what benefits are included and what fees may be charged to avoid surprises.
You should also consider your everyday credit card habits and determine if you need to make changes. Paying your bills on time and never carrying a balance are new habits you can develop to save money. If you’re ready to find your next card, check out our list of the best credit cards.
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