Credit card companies make the bulk of their money from three things: interest, fees charged to cardholders, and transaction fees paid by businesses that accept credit cards.
Use credit cards wisely, and you can minimize the amount of money that credit card companies make off of you.
» MORE:8 credit card fees and how to avoid them
How credit card companies work
The broad term “credit card companies” includes two kinds of enterprises: issuers and networks.
Issuers are banks and credit unions that issue credit cards, such as Chase, Citi, Synchrony or PenFed Credit Union. When you use a credit card, you’re borrowing money from the issuer. Retail credit cards that bear the name of a store, gas company or other merchant are typically issued by a bank under contract with that retailer. Hence these are often referred to as "co-branded" credit cards.
Networks are companies that process credit card transactions. The major networks in the U.S. are Visa, Mastercard, American Express and Discover. American Express and Discover are both networks and issuers.
» MORE: What makes Discover and American Express different from Visa and Mastercard?
When you use a credit card, money moves electronically through many hands, from the issuer, through the network, to the merchant’s bank. The network also makes sure that the transaction is attributed to the proper cardholder — you — so that your issuer can bill you.
» MORE:How to pick the best credit card for you in 4 easy steps
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Where the money comes from
You are a key ingredient in a credit card company’s moneymaking recipe, as are the merchants where you use your cards.
Interest
The majority of revenue for mass-market credit card issuers comes from interest payments, according to the Consumer Financial Protection Bureau. However, interest is avoidable. Issuers typically charge interest only when you carry a balance from month to month. Pay your balance in full, and you’ll pay no interest.
» MORE:What is a good APR for a credit card?
Fees
Subprime issuers — those that specialize in people with bad credit — typically earn more money from fees than interest. Mass-market issuers charge plenty of fees, too, although many of them are avoidable. Major fees include:
Annual fees. Annual fees are typical on cards with high rewards rates, as well as cards for people with less-than-good credit.
Cash advance fees. Issuers charge these fees when customers use their credit card to get cash at an ATM. The fees range from 2% to 5% of the amount of cash taken out, often with a minimum dollar amount, such as $5.
Balance transfer fees. When you transfer debt from one credit card to another to get a lower interest rate, you’ll usually be charged a fee of 3% to 5% of the amount transferred. Some cards don’t charge these fees, or waive them for a certain period of time.
Late fees. Failing to pay the minimum amount by the due date will usually result in a late fee. Some cards waive the first late fee or don’t charge these fees at all. (Your credit scores, however, can still suffer if you pay late.)
» MORE: It is worth paying an annual fee for a credit card?
Interchange
Every time you use a credit card, the merchant pays a processing fee equal to a percentage of the transaction. The portion of that fee sent to the issuer via the payment network is called “interchange,” and is usually about 1% to 3% of the transaction. These fees are set by payment networks and vary based on the volume and value of transactions.
🤓Nerdy Tip
Interchange fees are at the heart of a heated debate in Congress at the moment. The Credit Card Competition Act aims to introduce more competition among credit card payment networks, which proponents argue will help lower the interchange fees that merchants pay. Opponents of the legislation, however, say that doing so could threaten funding for credit card rewards programs.
Savvy customers cut their costs
Without cardholders like you, credit card companies don’t make money — but you can limit the amount they make from you. Avoid extra costs by:
Paying your balance in full every month to avoid interest charges.
Setting up electronic alerts that notify you when payments are due, so you avoid late fees.
Setting aside money in an emergency fund to avoid costly options like cash advances.
Choosing a credit card without balance transfer fees.
Paying an annual fee only if the rewards you’ll get from the card will exceed the cost. Remember that rewards and sign-up bonuses can put money in your pocket, but card fees and interest can eat right through it.
» MORE: Pay off your debt: Tools and tricks
What's next?
» Want to limit how much money credit card companies make off you? See how to avoid these common fees.
Credit card companies generate most of their income through interest charges, cardholder fees and transaction fees paid by businesses that accept credit cards. Even if you don't pay fees or interest, using your credit card generates income for your issuer thanks to interchange — or swipe — fees.
Then they make money from interchange fees that retailers pay on every purchase that a consumer charges to a credit card, from balance-transfer fees, and from customers who don't pay off the balance before the introductory period ends, thus having their remaining balances subject to the banks' regular interest rates.
Even if you don't accrue any interest, the issuer can make money from every card transaction. It does this by charging the merchant an interchange fee. These fees are usually 1% to 3% of the total transaction amount.
In fact, these loans actually accrue interest despite being called 0% interest loans. You just don't have to pay that interest if you pay the installments on time until the debt is paid off. Financial institutions count on the percentage of people who default or miss payments in order to make money from these loans.
The report found that in 2022 credit card companies charged consumers more than $105 billion in interest and more than $25 billion in fees. Total outstanding credit card debt eclipsed $1 trillion for the first time since the CFPB began collecting this data.
Credit card companies' most profitable customers are the ones who shop a lot and pay their bills on time. Card issuers share some of this swipe-fee bounty with their customers, through cash-back, free points and other perks. The more money you have to spend the more you can earn.
Carrying high balances on a 0 percent intro APR card might cause short-term damage to your credit score — but carrying those balances after the introductory APR expires creates a long-term problem. Once your zero-interest period ends, any unpaid balances will begin to accrue interest at the regular interest rate.
“The 0% APR offer is often in lieu of certain rebates. Depending on your credit, down payment, and the term of the loan, it may be better to take the rebate instead of the zero interest rate.”
A 0% APR credit card can work better for you if you plan on making a large purchase and don't anticipate paying the balance anytime soon. However, if you plan on paying the balance in full after each billing cycle and want to minimize costs, then a no annual fee card would be recommended.
While credit card issuers don't make money through credit card interest if you pay your balance in full each month, they make money through credit card fees and miscellaneous charges. Credit card networks also charge merchants interchange fees for every purchase you make.
American Express earns most of its money through discount revenue, primarily represented by earnings on transactions that take place with partner merchants. The company also generates revenue from cardholders through annual membership fees, interest on outstanding balances, conversion fees, and more.
While the term “deadbeat” generally carries a negative connotation, when it comes to the credit card industry, you should consider it a compliment. Card issuers refer to customers as deadbeats if they pay off their balance in full each month, avoiding interest charges and fees on their accounts.
Yes, a no-interest loan is legal, but be wary because no-interest loans could come with deferred interest charges that apply if you don't abide by their terms.
They make money from what they call the spread, or the difference between the interest rate they pay for deposits and the interest rate they receive on the loans they make. They earn interest on the securities they hold.
Key findings. Credit card companies posted $176 billion in income in 2020, down from $178 billion in 2018. Interest fees accounted for $76 billion and interchange fees accounted for $51 billion in 2020. Visa posted $6.13 billion in revenue in the second quarter of 2021.
Credit bureaus are businesses that work to earn a profit. They sell the information they collect to lenders such as banks and credit card companies. Each bureau tries to provide the most accurate information at the best price so that the bureau can get more businesses to buy its information.
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