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.
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.
Adelyn is a writer who covers personal finance topics such as saving money and the best credit cards, review the best credit cards offer, offer that you can apply online.
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