If you are a working professional then you must be thinking of having a credit card of a reliable so that you can bear all your miscellaneous expenses. And there is a common question that arises in every youngster’s or working professional’s mind is how credit companies make money or what is their revenue model.
And how they are making money when they offer rewards or cashbacks in bulk? Well, don’t worry!! We are here to provide you with the best answer to that question. This article provides you with the exact information about the revenue model or what is their prime source of income.
Let’s get straight to the point, let us tell you that your card issuer is doing absolutely fine. No matter how much cash back they provide. You will get to know how credit card companies make money and still grow.
How do credit card companies make money? This is largely depending on the payment ecosystem. Before we on to the module, let’s explore first what are the different types of cards that they offer.
Different Types of Credit Card Companies
To a cardholder, making a credit card purchase seems a simple process. You just swipe, enter your pin and see the magic in just a few seconds.
Well, in reality, there is much more to that in it. The two main players in this whole process are the cardholder and the merchant.
- Credit Card Issuers- A credit card represents a line of credit from a bank that uses and repay. Mainly it is the bank that holds the credit line. When you make any purchase, it is the bank that pays the merchant. When you make a make a credit card payment, it goes to your card’s issuer to repay the money it gave to the merchant.
In most cases, it is the only credit card company that deals with you and if you have cobranded like a store card, you may manage your account through the retailer’s website. However, the associated credit line is backed up by your bank. Your payments will go to that bank, even if they are en route to the retailer’s website first.
- Credit Card Networks- Making a credit card requires a lot of communication. Initially, the merchant needs to contact the bank for a successful transaction. Then, the bank needs to send the funds to the merchant’s account to cover the purchase.
All of this communication does not occur between the bank and the cardholder. This goes along with the credit card network. Credit card issuers partner with a specific credit card network for each of their credit cards, any given card can only operate on one payment network. You can only use your credit cards to make purchases where your merchant allows you to do so. For an instance, if a retailer only accepts Visa Credit cards, you can’t use your Mastercard to make a purchase at merchants that work with your card’s network.
How Do Credit Card Issuers Make Money from Cardholders?
As a cardholder, it might seem like you are the only profit source for every credit card company. But that’s actually true. Of the different types of card companies, the issuer is the only one that makes profits from the cardholder.
The money for issuers mainly comes from fees. On plus note, most of the fees can be avoided by savvy customers.
Annual Fees
This is the fee that you pay as a cardholder just to make sure that your account remains active. Most of the cards that charge annual fees are reward credit cards. In this case, annual fees help offset the cost of rewards. In this particular case, annual fees offset the cost of those particular rewards.
Interest Fees
For the majority of Card issuers, the bulk profit comes from interest fees. This is the fee that the issuer charges once the balance on your card surpasses the due date.
In layman’s terms, when you make a purchase with your card, the issuer pays the merchant. Until you pay off your balance, the issuer is out of money, this interest fees compensate the issuer for the lending.
Transaction Fees
Other simple purchases, most other types of credit card transactions come along with a fee. If you make a balance transfer then it would charge a transactional fee. Many cards often charge transaction fees when you make a purchase in another country or currency.
Penalty Fees
Opening a credit card account between you and the issuer comes along with a contract. If you break the terms of the contract then most issuers will charge a fee. For an instance, if you pay your bill after the due date, then the issuer would probably charge a late fee. Similarly, if you exceed your limit then you need to pay over limit fee.
We hope that you got the answer to your question, “How do credit card companies make money?” And stay tuned with us for more such informative articles.
Some FAQ’s Related to How Credit Card Companies Make Money
How do credit card companies make money if you pay in full?
No matter if you pay in full or before the day date. Credit companies still make money through annual fees and transactional fees. As long as you are actively using your credit card company is making money.
How do credit card companies make money on cashback?
Even if Credit Card Companies offer cashback, they are still able to make money through transaction fees or charge a higher rate of interest on the payments.
How do credit card companies make money with rewards?
When merchants accept payment via any credit card, they are required to pay a fee to the credit card company. If a customer is in the rewards program, then the merchant will share that fee with the customer.
How do credit card companies make money on balance transfers?
Credit Card Company not only makes money through purchases but if you transfer the balance then it charges transaction fees as well.
