HOW DO CREDIT CARD COMPANIES EARN REVENUES?

What is a credit card?

A credit card is a physical card that can be used to make purchases, pay bills, or, depending on the card,
withdraw cash. The simplest way to think of a credit card is as a type of short-term loan.

When an individual opens a credit card account, the credit card company gives themself a set credit limit.
This is essentially an amount of money that the credit card company allows an individual to use to make
purchases or pay bills. The available credit is reduced as the individual charge things to the card. That
person then pays back what was spent from the credit limit to the credit card company.

How credit card companies earn from credit card transactions

Credit card companies make money off every transaction, and in more ways than one. For example, they
earn income from consumers who pay to use their products, either through credit card interest or various
fees. In the meantime, merchants and retailers who choose to accept credit cards must pay for the
privilege.

Different types of credit card companies

1. Credit Card Issuers

Credit card issuers are the banks and credit unions that issue credit cards. Issuers lend the money
cardholders spend when they use their cards and levy credit card fees. Credit card issuers charge interest
when you carry a balance, and determine the terms and conditions of your credit card offer. Examples of
credit card issuers include American Express, Chase, Citi, Capital One, Discover, and Wells Fargo.

2. Credit Card Networks

Credit card networks are the companies that handle and oversee transactions between credit card issuers
and merchants. Essentially, they do this by creating and managing virtual networks that send and receive
payments. Credit card networks charge merchants for this service through something called an
"interchange fee." Card networks also make sure charges are attributed to the right consumer so that the
card issuer can send them a bill. Examples of credit card networks include American Express, Discover,
Mastercard, and Visa.

As you can see from the above, American Express and Discover are both credit card issuers and credit card
networks. This means they issue their own credit cards and also facilitate payments between cards and
merchants.

3 ways credit card companies make money

1. Interest

Credit card issuers make money from the interest they charge consumers when they carry a balance. The
amount of interest they charge individual consumers depends on their creditworthiness, but interest rates
also ebb and flow over time based on market conditions.
2. Credit card fees

• Annual Fees – Annual fees are typical on cards with high rewards rates, as well as cards for people
with less-than-good credit.
• Cash Advance Fees - Cash advance fees apply when consumers use credit card convenience checks or
use their credit card to get cash at an ATM. The fees range from 2 to 5% of the amount of cash taken
out.
• Balance Transfer Fees – When you transfer debt from one credit card to another to get a lower interest
rate, you’ll usually be charged a fee of 3% to 5% of the amount transferred. Some cards don’t charge
these fees, or waive them for a certain period of time.
• Late Fees – Failing to pay the minimum amount by the due date will usually result in a late fee. Some
cards waive the first late fee or don’t charge these fees at all. (Credit scores, however, may suffer, if
customers pay late)
• Foreign Transaction Fees - Many credit card issuers charge foreign transaction fees when consumers
use their credit cards for purchases abroad. These fees typically work out to 3% of the charge amount.
• Over-the-limit Fees - Where some credit card issuers deny purchases that push a credit card balance
over the credit card limit, others will approve them but charge an over-the-limit fee.

3. Interchange fees

Credit card interchange fees are fees charged by an issuing bank or a payment network (e.g. Mastercard
or Visa) to a merchant when they accept credit cards as payment. These fees are typically charged as a
percentage of each transaction amount (usually 1% to 3%), and for every purchase facilitated across a
payment network.

Sources:
Holly Johnson (Jan. 8, 2024)
https://time.com/personal-finance/article/how-credit-card-companies-make-money/

Melissa Lambarena (March 8, 2024)

https://www.nerdwallet.com/article/credit-cards/credit-card-companies-
money#:~:text=Credit%20card%20companies%20make%20the,companies%20make%20off%20of%20yo
u.

Rebecca Lake (Dec 20, 2023)

https://www.investopedia.com/how-do-credit-cards-work-5025119