How do credit card companies make money? Do credit card companies make money if you pay in full? And how much money do they earn from credit cards?
If you’re a credit cardholder, these questions probably popped into your head at some point. It’s one of the most important things to know if you want to be a responsible credit card user. This article explains how credit card companies make money and how your transactions contribute to it.
How Do Credit Card Companies Make Money?
Credit card providers generate profits and sustain their business through the following charges:
The first and arguably most obvious way banks profit from their credit card customers is from interest, particularly on missed or late payments. It’s where the majority of their revenue comes from.
But it doesn’t mean their systems are designed to trick cardholders. Credit card issuers offer automatic payments and send out reminders ahead of due dates to help their cardholders avoid debt.
Credit Card Merchant Fees in the Philippines
When consumers pay for something with their credit card, a portion of this purchase is split by credit card interchange fees. The retailer gets a part of this, while the bulk of the amount goes to the bank that issued the card to you (such as BPI or HSBC).
Another portion goes to the association that manages your account (Visa, MasterCard, etc.). For instance, Mastercard charges a fee on credit card issuers based on their gross dollar volume of account holder activity. It also earns from switched transaction fees on authorization, clearing, and settlement, just to name a few.
There are also interchange fees that affect merchants more than the cardholder. These are fees that the merchant's bank account must pay whenever a customer uses a credit or debit card to pay for purchases from their store. They’re paid to the card-issuing bank to cover handling, fraud, and bad debt costs and the risk involved in approving the payment.
These are generally categorized as fees associated with a credit card’s maintenance or additional features, such as the following:
- 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 should read the fine print, especially regarding the cash advance and balance transfer facilities.
How Do Credit Card Companies Make Money on Cash Back?
Most cash back programs have a cap or annual maximum limit. So even if credit card issuers offer generous rebates, they’re not unlimited. They’re also usually offered for specific categories only, like groceries or gas stations.
Cash back programs incentivize credit card users so that they’ll use their cards more often. The more they use their credit cards, the more merchant fees credit card companies can earn.
Related reading: Best Credit Card for Groceries in the Philippines: Top 14 Options
How to Reduce Your Credit Card Fees and Costs
Without their customers, credit card issuers naturally won’t make any profits. You can control how much money they make from you by avoiding the extra fees or costs. Here are some ways to do it:
✔️ Get a Credit Card with No Annual Fee
Annual fees are essentially membership fees, as they allow a cardholder to use the credit card’s facilities, such as rewards and cashback programs. Depending on the credit card, annual fees in the Philippines can range from ₱1,000 to as much as ₱6,000. If you get a credit card without an annual fee, that’s already thousands of pesos in savings.
So shop around for no annual fee credit cards or those that offer waived annual fees when you meet the spending requirement.
✔️ Pay Your Credit Card Balance in Full
When you pay your balance in full, you avoid interest charges every month. Credit card companies charge interest if you carry your balance to the next month. This means you’re paying your unpaid balance plus interest. As much as possible, try to settle it in full every month.
✔️ Avoid Late Fees
Late fee charges are one of the biggest reasons you should pay on or before your due date. Credit card companies charge high late fees on top of your total amount due.
You can avoid paying the hefty late charges by automating your payments and setting up electronic alerts. This way, you’ll get notified when your next credit card payment is coming up.
✔️ Set Up an Emergency Fund
Aside from late payments, your credit card company earns every time you make a cash advance. You get charged a 3% to 5% cash advance fee, which can be significant if you borrow a considerable amount.
So don’t make it a habit to withdraw cash from your credit card whenever there’s an emergency expense. Instead, set up an emergency fund to cover unplanned expenses. This way, you won’t be in debt from costly cash advance fees.
✔️ Choose a Credit Card with No Balance Transfer Fees
Planning to get another credit card to pay off your existing balance? If you’re getting weighed down by high interest rates on your credit card balance, you can transfer your balance to a new credit card.
Compare your options and get one with the lowest balance transfer fees. Some banks also offer zero interest rates as an introductory promo. Find the right credit card so you can maximize its money-saving benefits.
Credit cards are convenient tools when used correctly and responsibly. Otherwise, it can land you in a cycle of debt that's difficult to get out of.
Now that you know how credit card companies make money, use yours wisely. You can minimize how much they make off you and maximize your card's benefits by avoiding certain fees and charges.
-  How Mastercard Makes Money (Investopedia)
-  What are interchange fees and how are they calculated? (Big Commerce)