How do credit card companies make money? Have you ever wondered? Well, the answer to this question is simple and you just might be shocked. The money that credit card companies make comes from users in the form of fees and interest. And it also comes from merchants where you make use of the cards.
How Do Credit Card Companies Make Money
Credit card companies make the bulk of their money and funds from three things and they are interests, charged fees to cardholders, and lastly, transaction fees that are paid by businesses that accept credit cards. That being said, you should always be careful as to how you make use of your credit card, and you should also minimize the amount of money that these companies make off of you.
How Credit Card Companies Work
A credit card company as a term is a wide subject and it includes two types of enterprises and they are issuers and networks.
Issuers here are banks and credit unions that issue out credit cards such as Citi, Chase, and the rest of the like. When you get to utilize a credit card, know that you are borrowing money from the issuer. Retail credit cards that carry the name of a store, Gas Company, or any other merchant are usually issued by a bank that is under contract with the retailer. And for that reason, they are at most times referred to as “co-branded” credit cards.
Networks on the other hand are companies that process credit card transactions. The major networks in the US as you already should know are American Express, MasterCard, Visa, and Discover. American Express and Discover are however both networks and issuers.
When you make use of a credit card, money effectively moves electronically through many hands, from the issuer, all through to the network, and to the bank of the merchant. The network as you should know also makes sure that the transaction in question is attributed to the proper cardholder which in this case is you so that your issuer can get to successfully bill you.
Where Credit Card Companies Money Comes From
In regards to the money-making recipe of a credit card company, users are the major ingredient as are the merchants also where the cards are being used. Just as mentioned already in this post, these companies make their money in three ways, and with that being said, here is a more detailed explanation of how it all works.
The majority of revenue for mass-market credit card issuers directly comes from interest payments, as per the Consumer Financial Protection Bureau. However, interest as you should know is avoidable. Issuers typically charge interest only when users carry a balance from one month to another month. If only you can pay your balance in full, you will pay no interest.
Subprime issuers who are those issuers that specialize in people with bad credit get t typically earn more money from fees than the normal interest. Mass-market issuers however charge plenty of fees as well although many of them in question are avoidable. The major fees as you should know are annual fees, cash advance fees, balance transfer fees, and late fees.
Every time you make use of a credit card, the merchant in question pays a processing fee that is equal to a percentage of the transaction. The portion of that fee is however sent to the issuer through the payment network called “interchange,” and it is usually about 1% to 3% of the total transaction. These fees in question are set by payment networks and they also vary based on the volume as well as the value of transactions.
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