Ever wondered how credit card companies keep those rewards flowing while still making big bucks? While rewards cards are in the hands of 84% of credit card users, the profitability of credit card companies extends beyond just perks. Let’s demystify the world of credit card economics, exploring how these credit cards companies make money.
Decoding the Credit Card Network and Issuer Dynamics
First things first: there are credit card networks and credit card issuers.
Credit card network:
This is the entity connecting merchants and financial institutions. It’s the behind-the-scenes maestro authorizing and settling credit card transactions. In the U.S., major networks include American Express, Discover, Mastercard, and Visa.
Credit card issuer:
These are banks, credit unions, or financial institutions providing cards directly to consumers. With nearly 4,000 issuers in the U.S., big names like American Express, Bank of America, Capital One, Chase, Citi, and Discover rule the roost.
Your credit card journey involves a seamless but intricate dance between these networks and issuers. Whenever you make a purchase, a request zips through the network to the issuer, who gives the thumbs up or down, and the network completes the transaction. All this happens in mere seconds.
The Cash Flow: How Credit Card Companies Make Money
Credit cards are a gold mine, with credit card returns surpassing other banking activities. As of 2022, credit card debt breached $1 trillion, and consumers paid over $130 billion to credit card companies. Here’s the scoop on how they rake in the cash:
When you carry a balance — not paying it off by the due date — you dance with interest charges. Around 45% of card users carry a balance, contributing significantly to credit card interest income. The average APR hovers at a hefty 22.77%, causing Jane to repay over $550 in interest on a $1,000 balance over 52 months.
Every time you swipe, the retailer pays a fee (interchange fee) to the credit card network, ranging from 1% to 3% of the transaction. This revenue from interchange fees not only covers costs but also funds those enticing rewards programs.
Credit card fees are the cherries on top, adding to the profit feast:
- Annual fees: Premium cards may charge annual fees, offering a steady income source for issuers, ranging from $95 to $695 per year.
- Balance transfer fees: Moving money between cards? Be ready to pay 3% to 5% of the transfer amount.
- Cash advance fees: Need cash? Prepare to fork out 5% of the advance amount or $10, whichever is greater.
- Foreign transaction fees: Shopping abroad? Expect to pay 2% to 3% of the transaction amount.
- Late fees: Missed a payment? Some issuers charge up to $41, sweetening the pot for credit card companies.
Ways to Keep Your Money Where It Belongs
Now that you’re privy to the credit card money game, here are five strategies to keep more cash in your pocket:
Pay Your Statement Balance in Full
Maximize the grace period by paying off your statement balance before the due date. No balance, no interest charges.
Choose a Card Without an Annual Fee
Explore rewards cards without annual fees, like the Capital One SavorOne Cash Rewards Credit Card or the Hilton Honors American Express Card.
Avoid Cash Advances
Skip the cash advance trap; it’s an expensive credit option. Use your card for payments or consider payment transfer apps like Venmo or Zelle.
Set Up Payment Reminders
Avoid late fees by setting up payment reminders or opting for automatic payments. Timely payments mean no penalty APR.
Improve Your Credit
Enhance your credit score for access to lower fee and rate cards. Negotiate with your current issuer or explore better options based on your improved credit standing.
Understanding the inner workings of credit card companies empowers you to make savvy financial choices. By strategically managing your card, you can enjoy the perks without falling into the profit traps laid by credit card companies.