How Credit Card Companies Make Money ?


Imagine this – the next time you go to a shop or you’re buying movie or travel tickets online, how do you pay for them? Usually, we pay using a debit card, QR code, wallets, and last but not the least, the most famous and old-fashioned way – the credit card. The majority will say credit card and it is true, credit cards have become the most popular method of payments (after cash, of course!).

Smart talks about credit card concepts began as early in the 1800’s. Over time, this smart plastic money has transformed itself to more than just a payment method and is now a statement of one’s lifestyle.

International mammoths such as American Express, Citibank, Diner’s Club, Visa, MasterCard, Rupay and local tech intensive financial services have created a massive following of millennials and medium to high income groups which use credit card services regularly.

Other than free credit, credit cards also attract following owing to their international acceptance, reward points which have a monetary benefit, exclusive discount offers, customised insurance plans, etc.

Many companies have pushed their credit card USPs to rewards and benefits. This does count for a lot as rewards and benefits are secondary application of the credit card. The idea does fetch a thought or two in mind that credit cards are indeed a good source (and perennial possibly) of income to these issuing companies. But how exactly do they generate their revenue and make it sustainable enough to register good profit.

We shall explore the same in this article.

But let us first understand, what is a credit card and why use a credit card?

Credit cards are a way to borrow money from banks to spend on whatever you like, whether it be small bite-sized food to large purchases like a trip to Paris! As long as all the terms and conditions of the card are agreed upon and followed by you, you can safely pay through your card and pay your dues on or before a later date  at no extra cost!

Why Do you need a Credit Card?

The answer is simple:  credit without interest. It gives you the ease of carrying a considerable amount of money in your pocket without physically carrying any cash because you can spend as much as you want up to your credit limit. Additionally, it is safe and secure as all transactions are recorded in an encrypted manner and it can be easily disabled to avoid any kind of misuse if it is stolen or lost. More so, you can use it to do any kind of online payments also. And the best part, you can defer your payments till the end of the month this gives you a little financial independence when you are low on your savings or personal capital! It is basically taking small credits for small periods!

With the rise in digital payments, there is an amazing growth seen in credit card payments done by users. But really, how do these credit card companies earn, when in the end all you have to do is pay your Credit Card bill at the end of the month just like your utility bills and in bonus, you get reward points by spending from your credit cards as well! What makes it so lucrative that companies promote credit card as the prime form of payment to everyone? Not just this, they even bundle special reward programs and points on crossing some threshold limit of spending through these cards.

So how do these credit card companies really mint money?

Well, first of all, there is no doubt about it that credit card companies are in the business of making money. You might be wondering that with all the payout that they do to reward programs and the late payments that we have to do on our own spending how exactly do they remain profitable? Well here are the most revenue generating resources:

  • Interest payments

One of the obvious sources of their earnings are interest payments – companies charge a high rate of interest on late payment of credit card bills and collect interest payments from people who don’t pay their balances in full every month. These charges are very high and vary based on your credit limit and amount spent. Since many consumers overshoot their payments and overuse their credit limits. It makes up a huge source of revenue for the credit card issuers, the more you delay on payment, the more income for the credit card company.

  • Fees, fees and lots of fees!

Even if you don’t use your credit card, the credit card company still make a tidy profit in the form of various fees that they charge you. There are various types of fees and costs behind this credit card, some of them are:

  1. Annual fees – This is simply understandable just by its name, this is a fee that is paid every year by the customer in order to keep their credit cards working. Majorly every company take annual fees in some form or another but it always depends on the type of credit card the more premium the credit card the more probability of you paying higher annual fees.
  2. Late fees- Making late credit card payments is costly not just from the perspective of giving interest on the delayed payment but also the late fees charged by the company.
  3. Onboarding fees- This fees is something which you pay at the time of application for a one time payment that you do to the credit card company forgetting that credit card, even though it’s not a big sum of money and most of the companies don’t charge it but it is one of the sources of revenue for the credit card companies.
  4. Over limit fees – This fee is levied on the credit card that has a basic credit limit defined as for the financial position of its user. If in any month or the period of the credit card you cross that threshold of the credit limit then you are bound to pay over-limit fees, which can be a very high amount!
  • Selling your information

Well, this is a very debatable and grey area, but the recent awareness among the public about the data privacy should also shed light on the fact that even your payment information is stored by the credit card companies and sold to third parties for heavy sums of money. Why is your payment information so important and valuable? The answer is “profiling”, for each spender they create a profile and target him or her with ads that are more suitable for your lifestyle and your spending habits. These personalized adverts are more likely to generate a response which in turn will make you shell out more money and yes advertisements also make money for the banks! So yes, this shady business of information selling is also a big revenue generator for these companies.

  • Merchant fees

Do you think the credit card companies just charge you (the consumer) for payments? Well, you’re clearly wrong here. After consumers, the second largest source of income for credit card companies is the fees that they collect from merchants. Let’s put it in simpler words, when a retailer accepts credit card payment from the consumer, a percentage of the sale goes to the cards issuing Bank. In technical lingo, this is known as the interchange fee. The retailer has to pay the credit card issuing company an average between 1% and 3% of the transaction amount.

  • Assessment Fees

Visa, MasterCard, and American Express make money from assessment fees as well. What is assessment fee you would wonder? Assessment fees are a charge for processing credit card transactions; it is different from the interchange fees mentioned above. The company that has the logo on the bottom right corner of your credit card charges it and it collects a very small fee with each transaction that is known as the assessment fee. Usually, the fee is 0.13 % of each credit card transaction through visa and 0.12% for each MasterCard transaction.

  • Bundled products and offers

Chances are when applying for a credit card you might have skimmed through an offer which would have been offering you a product at a very discounted rate or giving you a service for free or at a very nominal cost or a shopping voucher for free. The credit card companies tie up with these product and service providers to promote their products as well as their own credit cards to increase the salability of their product. They, in turn, charge commission from these product and service providers on each sale of their product or service. This is not such a big amount but still a small source of revenue for credit card companies.

These reasons are why credit cards make it a win-win situation for both the parties; the banks make a handsome profit while selling the credit card to you. The consumers win by deferring their spending to a later date, earning reward points and getting exclusive offers. So now you know how they earn through multiple sources, share this with someone else to increase their knowledge!

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