How much money do credit card processing companies make? It might seem like they’re a get-rich-quick scheme, but you should know that the fees and rates they charge can vary wildly between different companies. If you are thinking about getting started with credit card processing, it’s important to know how your company will get paid before signing any contracts.
This guide on How Credit Card Companies Make Money: A Step by Step Guide, will walk you through the ins and outs of how credit card processing companies make money so you can take control of your finances and choose the right credit card processing company to provide services to your business!
First, let’s get a couple of facts out of the way. Yes, you need credit in order to make big purchases, such as a home or car. And yes, you probably use credit cards frequently if not daily which means that if you carry a balance from month to month, which most people do, then yes, you are paying interest on your purchases.
But How Much Money do Credit Card Companies Make?
What is their profit margin?
How does it all work?
Let’s take a look at how credit card companies make money and how they operate. We will also discuss some of their advantages and disadvantages, as well as tips for using them responsibly. At a high level, there are two primary ways that credit card companies make money: by charging fees to merchants who accept payments via credit cards and by charging fees to consumers who hold accounts with them. Let’s take a closer look at each.
5 Revenue Streams for Credit Card Companies
You know that credit card companies like Visa, MasterCard, discovery, American express make money by charging interest on unpaid balances and fees, but how do they make so much? The answer is a combination of 5 core revenue streams, each of which can generate significant earnings. This post will break down all five. We will also show you how to reduce your exposure to these revenue streams through better budgeting, smart spending habits, and responsible credit use.
1) Balance-Transfer Fees: When you transfer your balance from one credit card to another (usually at a lower rate), it’s called a balance transfer. This is a popular way for consumers to reduce their interest rates and pay off debt faster, but there are fees associated with each transfer that add up over time. These fees typically range between 3% and 5% of your total balance, though some cards have even higher fees or no fee at all. The average consumer has 10 different credit cards in his or her wallet, so these fees can really add up. If you plan on transferring balances to save money on interest payments, be sure to factor in these potential costs when considering which card makes sense for you.
2) Cash Advance Fees: If you take out cash using your credit card whether through an ATM or by visiting a store you will be charged a cash advance fee as well as an additional interest charge right away. Unlike balance transfers, which only incur interest charges after a set period of time, cash advances start accruing interest immediately. In addition to paying back your original purchase amount plus any applicable interest charges, you’ll also need to pay back any cash advance fees as well.
3) Overdraft Protection Fees: Your bank may offer overdraft protection services if you don’t have enough money in your account to cover a transaction. With overdraft protection, your bank will authorize transactions that would otherwise be declined and then charge you a fee for doing so.
4) Annual Fees: Many credit cards come with annual fees, which can cost anywhere from $50 to $500 per year depending on how much you use your card. While many people think they should avoid credit cards with annual fees because they don’t seem worth it, keep in mind that certain rewards programs may make them worthwhile. For example, if you travel frequently and earn rewards points toward free flights or hotel stays, an annual fee might be worth it for you.
5) Interest Rates: Of course, credit card companies make most of their money by charging interest on unpaid balances. Depending on how you use your card, you could end up paying hundreds or thousands of dollars in interest alone over just a few years. The best way to avoid racking up high interest charges is to always pay your bill in full every month. If you do carry a balance, try not to let it exceed 30% of your available credit limit; anything more than that can get costly fast.
Credit Card Transaction Fees
Anytime you use your credit card to make a purchase, you are probably charged with a transaction fee. Some cards have hefty transaction fees 3% is average while others have lower rates. If you always pay off your balance in full, look for a low-cost card that doesn’t charge these fees. If you carry a balance on your card and want to keep paying interest charges to credit card companies, go for one of their higher-fee cards.
Interest Charged On Credit Card
Most people have a vague idea that credit card companies make money off interest charges, but few realize just how much of their hard-earned cash goes toward funding some beachfront property in Delaware. On average, credit card companies charge an interest rate of around 20 percent (some charge as high as 30 percent) on outstanding balances. That’s a nice little profit margin for a middleman!
Credit Card Rewards Programs
Credit card companies make money in a variety of ways, but one of their most popular is through rewards programs. In other words, they are banking on you forgetting to cancel your credit card before your annual fee is due. While reward cards may seem like a great deal at first, you can end up spending more on fees than you earn in points or miles, so be sure to carefully compare before making a decision and read all fine print when signing up for these programs.
Miscellaneous Perks on Credit Card
The immediate perks of using credit cards are pretty simple. In most cases, your purchases are protected by law in case anything goes wrong but as long as you report them. That protection comes with a price though the credit card companies make money off interest rates, swipe fees and annual fees. Those three charges combined comprise almost half of all card profits. How much money do credit card companies make? A lot more than you would think.
Credit Card Customer Acquisition Costs
Credit card companies make money by charging customers interchange fees the difference between what they charge customers and what they pay merchants when a customer uses their card. The average interchange fee is 1% of each purchase. Let’s say you use your credit card to buy a book at Amazon for $10; you are charged an additional 50 cents on top of that, so your total purchase is $10.50. That 50-cent fee goes to Amazon, but your bank makes $0.50 from it. That is how much money credit card companies make off every transaction.