What Are at Least Two Ways Credit Card Companies Make Money?

The Short Answer

At least two ways credit card companies make money are interest charges and interchange fees. Interest is charged when cardholders carry a balance. Interchange fees are paid by merchants when customers use cards to make purchases. Credit card companies may also earn annual fees, late fees, balance transfer fees, cash advance fees, foreign transaction fees, and other charges.

The Federal Reserve describes credit card income as including interest income and non-interest income such as interchange, annual fees, late fees, and other fees. The two biggest ideas to remember are that cardholders can pay interest and fees, while merchants pay transaction costs.

1. Interest Charges

Interest is one of the most important ways credit card issuers make money. If you do not pay your full statement balance by the due date, the issuer may charge interest on the carried balance.

Credit card interest rates are often much higher than rates on many other loans. This is why carrying a balance can become expensive quickly.

For example, rewards worth $20 are not helpful if you pay $60 in interest because you carried a balance.

2. Interchange Fees

Interchange fees are transaction fees paid by merchants when a customer uses a credit card. The merchant’s payment processor, card network, and issuing bank are involved in the transaction flow.

The customer may not see this fee directly, but it is part of the cost of accepting credit cards. Businesses may account for these costs in pricing, margins, or payment policies.

Interchange helps fund rewards programs, fraud protection, payment processing, and card issuer revenue.

3. Annual Fees

Some credit cards charge an annual fee. Premium travel cards, rewards cards, and cards with special benefits may charge higher fees in exchange for perks.

An annual fee can make sense if the cardholder uses the benefits enough. It does not make sense if the fee is higher than the real value received.

4. Late Fees

Credit card companies may charge late fees when cardholders miss payment due dates. Late payments can also hurt credit scores and may trigger penalty rates depending on the card agreement.

The CFPB has paid close attention to late fees because they can be costly for consumers. Rules and litigation can change over time, so cardholders should read current terms.

5. Balance Transfer and Cash Advance Fees

Balance transfer fees are charged when a cardholder moves debt from one card to another. Cash advance fees are charged when a cardholder uses the card to get cash.

Cash advances are often especially expensive because they may start accruing interest immediately and may have higher rates than purchases.

Other Possible Fees

Credit card companies may also earn from:

• Foreign transaction fees
• Returned payment fees
• Over-limit fees where allowed
• Expedited payment fees
• Add-on products where permitted

Not every card has every fee. Some cards advertise no annual fee or no foreign transaction fee.

How Rewards Fit In

Rewards are not usually free from the issuer’s perspective. They are funded through a mix of interchange revenue, interest, fees, partnerships, and customer behavior.

Cardholders who pay in full can benefit from rewards. Cardholders who carry balances may pay more in interest than they earn back.

How to Avoid Paying Too Much

Use these habits:

• Pay the full statement balance each month
• Set up autopay or reminders
• Avoid cash advances
• Understand annual fees
• Do not spend just to earn rewards
• Compare APRs and fees before applying

Key Takeaway

Credit card companies make money through interest charges, interchange fees, annual fees, late fees, balance transfer fees, cash advance fees, and other charges. The simplest way for consumers to reduce costs is to pay on time, pay in full, and choose a card that matches their real spending habits.