How Credit Card Companies Make Money
Published: July 31, 2017 | Updated: April 16, 2020 | Posted by: Carlo Miguel Castañeda | Personal Finance
You might’ve wondered how credit card companies make money off of you if you’ve never had to delay payments, or left an outstanding balance on your credit card.
Part of the curiosity could stem from the fact that you get all these benefits and points that you can use for just about anything. There’s a catch to those: it’s one of the ways the companies make money off you. Creditors will profit from your shopping and from the places you shop at.
Here’s how credit card companies make money, and how they affect your usage.
The first, and arguably most obvious way that credit card companies profit off their consumers is interest. The revenue is pretty handsome, especially when it comes to missed or late payments.
This is where the majority of credit card companies’ revenue comes from, but their systems aren’t designed to trick cardholders – in fact, issuers would prefer that their cardholders don’t spiral into debt by providing options to set up automatic payments and send out reminders way ahead of due dates.
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Let’s say that you’ve got a balance of Php 63,887 and an interest rate of 3.5% per month, the table below shows how much interest is tacked onto your transaction each month:
2. Merchant fees
When cardholders pay for something with their credit card, a portion of this purchase is split by credit card interchange fees, meaning that the retailer gets a part of the amount you spent, while the bulk of the amount goes to the bank that issued you the card (such as BDO or BPI), and another portion will go to the association that manages your account (Visa, MasterCard, etc.).
Interchange fees affect merchants more than they affect a cardholder in that merchants will receive roughly 2-3 percent of a purchase, for example, a Php 100 purchase gives the merchant Php 97 or 98. Some other establishments might add a 2-3% surcharge on transactions made to cover these fees, so watch out.
3. Consumer fees
These are generally categorized as fees associated with a credit card’s maintenance or additional features such as:
- Annual fees
- Cash advance fees
- Balance transfer fees
- Late fees
- Foreign transaction fees
While these fees vary with every credit card and issuer, anyone looking to get a credit card will want to read the fine print. Especially when it comes to the cash advance and balance transfer facilities. These are two features that are best avoided unless there’s an emergency need, as the interest rates tacked on can damage one’s credit score too easily.
It’s also best to avoid late payments, as the fee is tacked on top of the interest you need to pay and the amount.
Annual fees are something of a “membership fee” as they allow a cardholder to use the credit card’s facilities – such as the rewards programs and cash back programs. They might seem tedious to pay, but there are credit cards that do not have an annual fee as long as the cardholder reaches certain spending limits.
Some credit card companies sell customers’ data to advertisers – retailers, in particular – to allow for these businesses to get a better insight on consumer habits and tailor products or campaigns. A report by Kate Kaye for Business Insider stated this a few years back, and while you might worry that your data is floating out there, the data sold off is anonymous and aggregated by ZIP code.
This practice is on the decline, however, as it’s become easier to target potential buyers off of ads posted online instead.
When it comes to credit card use, it’s easy to let things spiral out of control, resulting in a cycle of debt that can sometimes be difficult to shake. Credit cards are convenient tools when used and maintained properly.
When looking for a credit card, it’s important to determine what you plan on using it for, and whether or not your need might be better served by a debit card instead. If you are going to use a credit card, remember that you’ll avoid interest and late fees if you pay your balance in full every month.