Ways Credit Card Companies Pocket Your Money
The Federal Reserve Profitability of Credit Card Operations shows that credit cards were used in transactions that involved over $24 trillion in 2012 – that’s trillion with a T. As more businesses and consumers move to paperless and mobile technology for paying their bills and making purchases, credit card companies won’t be short on customers or revenue opportunities.
In recent years, risk based pricing has been more often than not the way issuers establish a rate for cardholders, which is based on their risk profile. If the borrower fails to meet the plan agreement, the issuer may re-price the account at a higher rate to counter the increased risk. To protect your bottom line and avoid paying more to your credit card issuer than absolutely necessary, it’s important that you understand how credit card companies make money.
Credit card revenues fall into one of five categories: account fees, interest rates, penalties, selling additional services, and interchange fees. Cardholders pay three of these directly to the issuer and indirectly through the price of products and services. The categories break down further into more specific charges: annual fees, over-the-limit fees and late payment charges, transfer fees, etc.
- Account Fees: These are the charges imposed on every card holder. An annual fee may apply or you may choose to transfer a balance or withdraw cash which will add mean an additional one-time charge to your credit card balance.
- Interest Rates: The most lucrative money maker for credit card companies (approx. two-thirds of revenue) is also the most obvious – the interest charged for balances carried on every account. The type of card, account terms and the credit rating of the card holder will be used to determine the specific cost of each account.
- Penalties: This is the second largest revenue maker for issuers with the average late fee of $30. A third of consumers fail to make all of their payments on time meaning they add penalty fees to the coffers of credit card companies. Spending over your credit limit will warrant another penalty fee of approximately $20. Interest rates associated with your credit card may rise upwards of 26% for late or overdraft infractions. Your credit report will be adversely affected as a result. The penalty APR will be lowered after about 6 months of timely payments.
- Up Sell Services: Another way to increase revenue is by selling services to their cardholders when they contact customer service or included in your monthly statement, i.e., credit monitor, fraud protection fall under this category.
- Interchange Fees: This fee is what a merchant pays to the credit card companies for processing each transaction. The Federal Reserve limits rates to .05% of the value of every transaction applied to the card plus $0.21. Some credit card issuers also charge a foreign exchange fee for purchases made abroad, generally 2-3% of the cost.
Credit card companies, just like any retail enterprise, are in business to make money. They depend on customers who carry a balance to increase their bottom line and make the most of their money on those who mismanage their account by paying late and paying standard interest rates on large balances. So if you’re a consumer who wants to keep more of your hard-earned money when using a credit card, you’ll need to focus your attention on paying the balance off every month.
Vanessa May writes for www.wowcreditcards.com along with various financial-based blogs. Striving to educate consumers, she uses government and other reputable sources to provide helpful, relevant information on managing finances, credit news, credit cards, debt relief services and other finance topics.