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How Do Credit Card Companies Make Their Money?

We’ve all received offers, often quite persistent, to sign up for a new credit card. Credit cards themselves are great, because you can get the things you need even without cash readily available.

Author: SA Perillo
Date: May 26, 2011 - 8:26:22 AM

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We've all received offers, often quite persistent, to sign up for a new credit card. Credit cards themselves are great, because you can get the things you need even without cash readily available. However, don't you ever wonder how many credit card companies are out there? Because of the growing market for credit card users, it seems that every day, you get a solicitation letter for a new credit card company. The large playing field results in a lot of competition for credit card companies.

Creditors mainly get their income from the interest and fees on credit cards. Technically, you pay the interest as a fee for using the credit or the revolving balance on your credit card. Since you use the creditors' money to pay your bills, you have to pay them for the service as well.

The most common mistake most credit holders make is to assume their interest will stay the same for years to come. The interest is greatly affected by your credit score, which can hike up or lower the interest. Creditors are alarmed when they see a cardholder with a low credit score, so they need something to ensure that the person will pay off his/her debts. This is the reason why they hike up interest rates.

Fees are something most credit card holders will have to deal with. Almost everything that breaches the contract will require a fee. Late payments and overspending (going over the credit limit) both require fees. Some creditors even have hidden fees, which you won't know about unless you've read the fine print. Also, most credit card holders seem to forget that an annual membership fee will be paid for many cards, at the end of the year.

Late payment fees and fees for going over the credit limit can be priced anywhere from twenty to forty dollars. Don't underestimate the power of a couple of bucks, though. This is where creditors get the majority of their income. Annually, creditors collect roughly about fifteen million dollars worth of late payments and over-the-limit fees.

Fees are one of the reasons why many people get into debt with their credit cards. Sometimes, paying the minimum payment isn't enough to lower your balance. In fact, even if you pay the minimum amount, you might find yourself with a debt that is increasingly larger, because of well-placed fees and other charges. Even if they're not using their credit cards to buy anymore, the debt will still go up because they are unable to settle their accounts.

Always remember that credit card companies aim to make money. They are businesses just like any other, so they will try to make money any way they legally can. The best thing you can do to protect yourself from these predators is to be informed. Never sign up for a credit card when you haven't read the fine print, and always keep your finances in check to ensure that you don't fall into debt.

View all articles by SA Perillo

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