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How Credit Card Companies Make Money

Businesses need to profit, but you don't have to be a contributing factor.

Justin Cupler

Contributing Writer at Tally

July 8, 2021

With the convenience of credit cards, it's sometimes easy to forget they’re a multibillion-dollar industry that rakes in profits. From the fees they charge consumers to the merchant fees they charge retailers, credit card companies are rarely hurting for revenue sources. 

So, how exactly do credit card companies make money? We'll cover all their key revenue drivers and how you can save money by keeping your cash out of their growing stash. 

How Do Credit Card Companies Make Money?

Credit card companies' primary source of income is from the consumer. Between the fees and interest rates they charge, these companies can bring in some serious cash. 

Here are the main ways credit card issuers make money and how you can limit these fees. 

Interest charges

Who profits from interest on credit card debt? The credit card companies — big time. 

The interest rate, often expressed as annual percentage rate (APR), is how much the credit card issuer charges for lending money to buy an item. 

Most credit card interest rates are in the 17% to 25% range, but they can sometimes fall into the low teens and go as high as the mid-30% range. The interest rate you get depends on the credit card company's algorithm, what's on your credit report, and your credit score. 

How much money can the credit card company make off just interest alone? Let's say you have a $2,000 balance on a credit card with an 18% interest rate. Suppose that credit card has a minimum payment of 3% of the balance, and you make only the minimum payment. In that case, you'll pay that credit card company $793 in interest over the 47 months it'll take to pay off the balance.

Interest charges are relatively easy to avoid. Simply pay the full credit card balance listed on your monthly credit card bill by the due date. As long as it's paid in full by the due date, the credit card company won't apply any interest charges to your account since you’re within what's called the interest grace period.  

If you're not in a financial situation to pay off all your credit card debt in one billing cycle, you can also call the credit card company and see if they'll negotiate a lower interest rate

Alternatively, you could consider a debt consolidation loan, which is a personal loan that allows you to pay off all your credit cards with one loan. This could reduce your interest rate and turn multiple monthly payments into just one. 

Late fees

Fees are profit centers for credit cards, including late payment fees. The Credit CARD Act of 2009 regulates late fees by applying caps relative to the consumer price index. On January 1, 2019, the Consumer Financial Protection Bureau raised the late fee limits by $1. This brought first-time late fees to $28 and all subsequent late fees up to $39.  

Credit card companies can apply this fee the day after your due date if you haven't submitted a payment. 

You can avoid late fees by setting up an automatic credit card payment to cover at least the minimum monthly payment. Most credit card companies allow you to do this through their mobile app or online. 

If your credit card doesn't offer this, you can set up automatic bill pay through your bank account. Remember to schedule the payment so it posts on or before the due date. Your bank's online bill pay system will tell you the estimated time of arrival when you schedule the payment. 

If you prefer to mail a check to the credit card company, try to send the payment a week before the due date to ensure it arrives before the late fee applies. 

Annual fees

Some credit cards charge cardholders a fee every year just to have a credit card in their wallets. This fee varies greatly and is not regulated by federal law. Annual fees typically range from $49 to $499 and are often relative to the perks a card offers — the more perks a card boasts, the higher the annual fee usually is. 

In some cases, you can call your credit card company and request they waive your annual fee. Some credit card companies may be willing to do this a few times to keep you on as a customer. 

Otherwise, the only way to avoid an annual fee is to check the terms and conditions for an annual fee and choose a card without one. 

You can also offset the annual fee by looking through the credit card perks — such as warranties, sign-up bonuses, cash back, free services or retailer discounts — and determining the actual cash value of each one you'll use. If that actual cash value is higher than the annual fee, then the annual fee may be worthwhile for you. 

For example, many travel-focused credit cards offer statement credits for TSA PreCheck, which is an $85 value. If you’re a frequent traveler and already subscribe to TSA PreCheck, an annual fee of $85 or less would be covered by the credits you’re earning. 

Balance transfer fees

Some credit cards offer promotional balance transfers, like 0% APR for a set period. This may seem like they are willing to forgo all profits during that period, but a closer look at the terms will likely reveal a 3% to 5% balance transfer fee

So, if you transferred $1,000 onto a card with a 5% balance transfer fee, the balance transfer credit card company would make a quick $50 profit on that transfer. 

You can avoid this fee by checking the credit card's terms and conditions and finding a credit card with no balance transfer fee, but this is rare. That said, these balance transfers typically come with 0% APR. The lack of interest charges might make the small balance transfer fee worth it. 

You can calculate the amount of interest you'd pay and compare it to the balance transfer fee. If the transfer fee is less than the interest, it could be worthwhile to pay the fee.  

Cash advance fees

Cash advances are for those emergencies when you need cash, but don't have it. For example, your car breaks down, and the shop in the area only takes cash, but you don't have enough money in your bank account to cover the repair. 

You can go to the ATM and use your credit card like a debit card to take out the cash you need. However, this convenience comes with a fee. Each company varies, but some charge you a percentage of the cash transaction, while others charge a fixed fee for a cash advance. You can determine which fee structure your credit card has in its terms and conditions. 

You can avoid this fee by building a sustainable emergency fund that's easy to access and well-funded. 

Foreign transaction fees

If you frequently travel out of the country and use your credit card, you may start seeing small fees on your foreign credit card transactions. These are foreign transaction fees. The credit card issuer and the payment processor — Mastercard, Visa or American Express — charge these fees to convert a foreign currency into U.S. dollars. 

This is typically around 3% of the total transaction, with 2% going to the credit card issuer and 1% going to the payment processor. 

You can avoid this charge by opting for a travel-focused credit card, as many of these have no foreign transaction fee. You can verify there's no fee in the terms and conditions or credit card disclaimer.

Retailers Drive Profit for Credit Cards, Too

Credit cards profit in other areas too, including the retailers who accept their credit cards. These merchant fees are called interchange fees.

The interchange fee is a percentage of the credit card transaction — typically 1% to 3%. This per-transaction fee varies based on the credit card processor the company uses and its sales volume.

While the merchant is responsible for paying the interchange fees, some smaller retailers, nonprofit organizations and government offices will offset the cost by charging credit card users a small fee.

Limit Fees and Reap the Rewards

How do credit card companies make money? Now you know the list of revenue streams is rather long — from consumer credit card fees and interest charges to merchant fees. 

While it's perfectly fine for businesses to make a profit, you don't have to be one of the reasons they do so. Instead, by decreasing their opportunities to charge fees and keeping your interest charges to a minimum, you can flip the profit in your favor by earning reward points and cash back without paying a dime in interest or fees. 

If you want to earn points instead of paying interest but you find yourself with too much debt to manage, Tally can help. With Tally's line of credit1, qualifying users can pay off their credit cards with a low-interest credit line. Not only will this accelerate debt repayment, but Tally also makes it easy with just one monthly payment. Tally distributes the funds to the credit cards for maximum savings in interest based on the debt avalanche method.

1To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) Will be between 7.90% - 29.99% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.