How Credit Card Companies Make Their Money

Everyone knows the banks can be quite profitable companies, and that one of their most profitable products that they create is the credit card. They know that consumers will leave balances on their cards and that they will make a great amount of money in interest. This is why they send out six billion credit card offers every year, and that number is rising! Credit card companies actually make their money in a number of different ways, continue reading to learn about fees and charges that some credit card companies charge to you and merchants.

The first and most widely known about expenses is finance charges. Whenever you do not pay your balance off at the end of the month and carry a balance over on a credit card from the previous month, you will be charged a fee approximately one twelfth that of your annual percentage rate in your card holder agreement. Sometimes credit card companies use the twelfth root of your annual percentage rate, depending on how they calculate the fee. Each month you carry over a balance you will be charged a finance charge.

Another major method for credit card companies to make money is with what is called an interchange fee. Whenever a merchant accepts a credit card or debit card as payment, they pay a small percentage, usually about 2% or 3%. Of this fee, the majority of it goes to the card issuers bank, some of it goes to transaction processing network, and some of it goes to the card association (such as Visa or Mastercard). As part of the credit card companies overall income from a customer, interchange fees generally make up about 15% of the money they make off a customer. This number can be much higher if a customer uses their credit card to make numerous day to day expenses such as lunch or snacks.