How much do credit card companies make on average monthly or yearly? How do credit card companies work? Here are 5 subtle ways credit card companies make money. A credit card is a thin electronic plastic card usually issued by a bank or credit card company. Being a financial tool, a credit card allows you to make purchases and take cash advances.
When you are issued a credit card, you are given a line of credit, which is typically the maximum balance you can accumulate on the card. A credit card allows you to carry a balance indefinitely provided you make the required minimum monthly payments. Credit cards are very popular in countries such as the united states, where majority of citizens have at least one credit card. It is also becoming popular in many other countries of the world.
Interestingly, you can use a credit card without paying any charges provided you are able to pay off your balance before the due date. Paying up your charges in full each month is the right way to use a credit card because you can accrue substantial rewards such as cash backs, and you pay no interest. Using your credit card this way also helps you improve your credit score.
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How Credit Card Companies Work
We all know that names like “Mastercard” and “Visa” show up on most credit cards. These companies (Mastercard and Visa) are not credit card issuing companies themselves; they Are credit card networks. These networks make money by charging merchants a small but significant fee per transaction.
Credit card issuers are the banks or companies that issue credit cards to consumers. Examples are Citibank, Chase, bank of America, and other banks and companies to which people send their credit card applications.
Credit card issuing companies bear the risk that you won’t pay the charges applicable on your card, so they set the interest rate and fees. If you don’t pay off your monthly charges by the due date, then the issuing company starts to make good money. Even if you pay off your monthly charges before the date each month, they are still making money off of you in other ways, as explained below:
5 Subtle Ways Credit Card Companies Work and Make Money
1. Low introductory rate
While low introductory rates might seem like they are in the interest of the consumer, credit card companies use these low rates to lure clients. Some companies may even offer zero introductory rates or zero percent interest fees for the first few months.
But in reality, once you get comfortable with the rate, the credit card company will increase it slightly. This way, they keep driving you up the ladder until you start paying much more than you started off with. The gradual increments are usually well stated in fine print, but most consumers don’t read these details thoroughly—probably due to the “zero interest” blindfold.
2. Late fees
If you pay your credit card monthly bill later than the due date, you will get hit with the late payment penalty—even if you are late by just one day or two. Worse, your credit card company might eliminate the “grace period” between the moment of purchase and payment due date, and then determine that you have borrowed your entire outstanding balance from the time of purchase until the time of payment.
The company can then charge you interest on that balance. Following an instance of late payment, your credit card company can cancel your rewards and raise your interest rates.
3. Fees for exceeding your credit limit
If you charge more to your card than the credit card issuer has allowed, you may not have the charge declined. In that case, you will be slapped with a penalty for exceeding your credit limit. Some credit card companies charge $20 for every $100 you spend above your credit limit.
In other words, you will be borrowing extra money at the rate of 20 percent per month. By calculation, if you go beyond your credit limit by $700, you will have to pay back $840 in addition to otherwise applicable interest.
4. Cash withdrawal fees
You can use your credit card as an ATM card. But each time you withdraw cash from an ATM machine, you will most likely be billed a one-time transaction fees in addition to paying interest right from the moment you receive the cash.
5. Balance transfer fees
Most credit card issuers offer balance transfers at low rates. That is, if you roll over your outstanding balance from another credit card to theirs, they will charge you a reduced interest rate. However, most credit card companies will still charge you a balance transfer fee, which is usually a specified percentage of the balance rolled over.
In addition to these, some credit card companies charge an annual fee, which you have to pay before you start using the card. Some companies also charge transaction fees following each transaction you use the card for.