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How Do Credit Card Companies Make Money?

how do credit card companies make money

The credit card industry is definitely a lucrative one. In 2019 alone, U.S. credit card companies made almost $179 billion off of consumers. And that doesn’t come as much of a surprise, considering most of us are walking around with a credit card in our wallets. But how do credit card companies make money?

We’ll be answering that question in this article, as well as sharing a few tips on how you can save money on credit cards.

How credit card companies work

Before we dive into how credit card companies make their money, let’s talk quickly about how credit card companies work.

First, there are two types of credit card companies. A credit card issue is generally a financial institution that issues your credit card and who you pay your bill to each month. Examples of credit card issues include Capital One, Chase, or even your local credit union.

A credit card network processes the credit card transactions. Major networks include Visa, Mastercard, Discover, and American Express. And in the case of Discover and American Express, the companies act as both the card issue and card network.

When you use your credit card, you’re borrowing money from the credit card issuer, with the card network acting as the middle person to process the transaction.

How credit card companies make money: 3 ways

There are three main ways when it comes to how credit card companies make money. They include:


When you use your credit card, you’re borrowing money from a financial institution. If you don’t pay off your balance in full at the end of the statement period, your balance begins to accrue interest.

Interest is where credit card companies make most of their money. In 2019, the five largest credit card companies brought in a combined $91.4 billion in interest from borrowers. Unfortunately, this doesn’t come as much of a surprise.

According to Experian, the average credit card balance on credit cards in 2020 was $5,897, and the average credit card interest rate is 16.12% (though they can easily exceed 20%).

Card user fees

Credit card companies also make money on the fees they charge cardholders. Here are a few of the common fees they charge:

Annual fees

While many credit cards don’t require an annual fee, companies often charge them on cards that come with significant sign-up bonuses or user perks such as cashback and miles. The average credit annual fee is about $80.

Balance transfer fees

A balance transfer is when you transfer the balance of one credit card to another card, usually to get a lower interest rate. When you transfer the money, you often pay a balance transfer fee of a few percent.

Cash advance fees

A cash advance is when you withdraw cash from your credit card account. It’s similar to taking out a loan, but you’re simply borrowing against your credit card balance. In addition to the interest you pay on these advances, many companies also charge a fee.

Late fees

When you don’t pay your credit card bill by the due date, you’ll usually be hit by a late fee. A 2019 study by U.S. News found that the average maximum late fee is roughly $36.

Merchant processing fees

In addition to the fees they collect from consumers, credit card companies also collect money from the merchants who accept credit cards.

These fees, known as interchange fees, cover the issuer’s cost for processing the transaction. In 2019, the five largest credit card companies collected a combined $28.9 billion in interchange fees.

How to reduce credit card costs

There’s no doubt that credit card companies make a lot of money from consumers. But there are plenty of ways to reduce the amount you’re paying to credit card companies.

In fact, if you use your credit cards responsibly, none of your money has to go to credit card companies at all.

Pay your balance in full every month

The best way to save money on your credit cards is to pay your balance in full every month. When you do this, you don’t have to worry about paying interest.

You’re only paying back the amount you actually borrowed. As an added bonus, paying off your balance doesn’t just help you save money on interest. It also reduces your credit card utilization, which can boost your credit score.

It's all about using credit cards wisely.

Pay your bill on time each month

Another way to avoid giving your money to credit card companies is to pay your credit card bill on time each month. Doing so can help you to avoid late fees and maintain good credit.

And if you’re having a difficult time remembering to pay your bill, you can set up an automatic payment, so you never have to worry about it.

Negotiate your interest rate

Credit card interest rates aren’t set in stone. If you find that a lot of your monthly payment is going toward interest, call your credit card company and negotiate a lower rate.

It won’t always work, but it’s worth a shot. Here's a script that you can use on your phone call.

Search for cards with no balance transfer fees

If you’re transferring your balance to help avoid paying interest, shop around for a card with no balance transfer fees. Depending on the size of your balance, this could save you a considerable amount of money.

Negotiate your annual fees

If you have a credit card that charges an annual fee, you may be able to negotiate with them to waive your annual fee. Many credit card companies have done so during the recent pandemic, especially in the case of travel cards where customers couldn’t fully enjoy their credit card perks.

Have an emergency fund to avoid cash advances

A cash advance is typically only used in the case of an emergency where you need cash immediately and don’t have another way to get it. And while these situations are often inevitable, having an emergency fund in place can help you save money.

Rather than paying a cash advance fee and interest, you can earn interest on your emergency fund while it sits in a savings account, and then it’s there to protect you when you need it.

Check your credit card statement regularly

Many of us have had a situation where we check our credit card statement, only to find something that shouldn’t be there. Sometimes it’s an honest mistake, and the credit card company fixes it, but sometimes it’s a fee that we weren’t expecting.

And in the worst-case scenario, it’s a case of identity theft where someone has used your credit card number. Checking your statement regularly can help ensure you aren’t paying for any fees or charges that you shouldn’t be.

The bottom line of how credit card companies make money

Credit card companies make billions of dollars each year, primarily from their customers. Unfortunately, many people don’t realize just how much of their hard-earned money is going to their credit card company.

If you use a credit card, it's important that you understand the advantages and disadvantages. It's also important that your plan your finances and budget accordingly so you can pay off your credit card balances as soon as you can.

Luckily, following the tips above can help you to avoid unnecessary interest and fees and keep more of your money for other financial goals.

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