How Do Credit Card Companies Make Money?

by Martin

We always write about the best credit cards for students on here because we want you to get the most bang for your buck. This is why today I wanted to show you how credit card companies actually make money off student credit cards.

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 on student credit cards can add up.

This is where credit card companies generate the majority of revenue. The zero APR on student credit cards is introductory for the first six months or so. The interest kicks up after that.

A very common scenario is where credit card users blindly use their credit 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’ll 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’ll 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 credit card 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?

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.

At the end of the day we want you to find the best student credit card possible. We also want you to avoid making certain mistakes so that credit card companies don’t rip you off.

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{ 1 comment… read it below or add one }

1 Joshua

I know that merchants have to pay a fee when a consumer uses a credit card, but I’ve always been curious as to where this money goes? Does it go to the network (Visa, MC, AmEx), or does it go to the financial instiution (Chase, CitiBank, BofA)? Or is it split between them in some way?

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