How Do Credit Card Companies Make Money?

A little bit ago I shared an offer for a free $50 from a credit card company with you guys. One of my friends from this blog then asked me how this was possible. This person wanted to know why a credit card would give money away and how credit cards exactly make money.

How do credit cards make money? I mean think about it. You get a credit card with a $500 limit. You automate a few re-occurring payments to your credit card, you buy the odd thing with your credit card, then when you get your statement in your mail you pay off your credit card balance.  Occasionally you take advantage of your credit card rewards or you find an offer worth pursuing. How does the credit card provider make money in all of this?

Well first of all I just outlined an absolute best case scenario above. Below are where credit cards earn the bulk of their revenue:

Interest payments.

This is where credit card companies generate the majority of revenue. Credit card users will blindly use their card during the month to make purchases. At the end of the month the credit card statement comes in the mail and they realize that they will be unable to make the full payment. Some users will make the minimum payment, while others will not put any money towards the credit card bill at all. That’s cool for the credit card company. They will just charge you interest (usually 19% APR) on the amount that you owe. The more that you owe, the more that you’re going to have to pay in interest payments. You’ll start to pay interest on your interest. Your credit card debt can easily spiral out of control leaving you in massive debt.

How can I combat this?

1. Pay off your balance on time.
2. Don’t use your credit card if you don’t have to.
3. Reduce your limit.

Activation fees.

From activation fees to annual fees, credit card companies must enjoy this little revenue boost. When you sign up for a new credit card you need to figure out if you’re going to have to pay a “one time” or an annual fee.

How can I beat this?

• Look into free college student credit cards.
• Take advantage of credit card incentives.

Transactions.

Cash advances are not free. The actual percentage charged varies on your credit card provider. You’re going to have to pay a premium to have access to this cash from your credit card provider.

What can I do about this?

There’s really only one way to deal with this issue– avoid using your credit card for cash advances. Yes I know that it’s easier said than done, but you need to deal with this.