How Do Credit card Companies Make Money

Credit card companies, as you might think, do not work for free. When you see a $200 sign-up bonus on a card with no annual charge, you have to wonder how they make a profit. How can credit card companies make money when they appear to be giving out perks for free?
Credit card companies make the majority of their money from three sources: interest, fees charged to cardholders, and transaction fees paid by businesses that accept credit cards.
The way each sort of credit card firm makes money is determined by its specific function in the payment ecosystem. Let’s start by looking at what the various types of credit card companies do, and then we’ll look at how they make money doing it.

Types of Credit Card Companies

You may be well aware that you pay your monthly credit card bill to the bank or financial organization that granted you the credit card line. Other credit card companies, however, are involved in the payment process.

#1. Credit Card Issuers

The business that issued you your credit card is known as the credit card issuer. Credit cards are issued directly to consumers by major banks, credit unions, and other financial organizations in the United States. Chase, Capital One, and Pentagon Federal Credit Union are a few examples.

#2. Credit Card Networks

Credit card networks, also known as card associations, operate with credit card issuers to function as a go-between for your bank and the merchant’s bank. The four primary card networks in the United States are Visa, MasterCard, American Express, and Discover.

Some networks also act as card issuers, providing consumers with their own credit card products. In addition, the credit card network often sets transaction interchange rates (more on this later), relays whether a charge was allowed or refused, and flags possibly fraudulent credit card activity.

#3. Credit Card Processors

A credit card processor, as the name implies, is the organization that actually conducts the transaction between the issuing and receiving banks. Stripe, PayPal, Block (previously Square), and Elavon are examples of credit card processors.

Furthermore, some credit card processors ensure that the merchant and transaction are secure and meet the Payment Card Industry Data Security Standard (PCI DSS).

Brief Breakdown of How Credit Card Companies Make Money

Banks and credit unions, which are in card of issuing cards, make money from cardholders who pay interest, yearly fees, late fees, and other costs. They also make money from merchants who want to take debit or credit cards by collecting merchant processing fees on their card-based purchases.

  1. Consumer obtains a credit card: When a customer obtains a credit card, they may be charged yearly or balance transfer fees.
  2. A consumer makes a purchase from a merchant: A customer pays $10 for products at a credit card-accepting merchant.
  3. Merchant accepts card cards: The card reader will recognize the customer and the bank with which they are affiliated (for instance, Bank of America).
  4. Merchant bank contacts card’s bank: After receiving information about the purchase, Bank of America transfers $10 to the merchant’s bank, for example, Chase.
  5. The merchant bank sends money to the merchant: Chase, the merchant’s bank, will deliver $9.80 to the merchant after deducting a 2% or 20-cent fee.
  6. Merchant bank transfers funds to credit card network: Chase will then transfer funds to their credit card network, which could be Visa or Mastercard.

How Credit Card Companies Make Money From Cardholders

Credit card companies make money from cardholders in a variety of methods, including interest, yearly fees, and other costs such as late payment fees. Here’s an explanation of how each of those fees works:

#1. Interest.

When you carry a credit card balance, you are often charged interest in exchange for the ability to borrow money. Your interest rate—or annual percentage rate (APR), which combines interest and fees into one rate to help you understand how much the card will cost you over the course of a year—varies by lender and is determined by your creditworthiness. Credit card interest rates can be rather high (15% to 30% or even higher), which is why you should pay your payment in full each month to prevent these costly penalties.

#2. Annual charges.

Annual fees are often charged by credit card issuers on rewards cards and bad credit cards. These annual fees can be quite high depending on the card, especially for cards that give top-tier benefits.

#3. Charges of several kinds.

Several potential fees are included in this category. To begin, if you do not pay your account on time, the card company will charge you a late fee. They may also charge you cash advance fees, balance transfer costs, foreign transaction fees for purchases made outside the United States, and over-limit fees if you spend more than your credit limit. The cost amounts vary by issuer, but the good news is that if you handle your card properly, you may never have to pay these fees.

How Do Credit Card Companies Profit From Merchants?

Although credit card issuers are the only card companies that profit directly from cardholders, retailers benefit almost everyone. Through various processing fees, issuers, networks, and processing companies all get their cut from retailers.

#1. Interchange fees

When you use your credit card, your issuer charges the retailer a transaction fee. This is known as an interchange fee.

Exchange fees are normally imposed as a percentage of the transaction amount and range from 1% to 3%. However, the exact amount of the interchange charge varies greatly depending on the issuer, merchant category, payment method, and even the card used.

Interchange fees fund the costs of keeping your credit card account active, such as fraud prevention and account security. Even if you never pay an annual or interest fee, the issuer will earn from your card account as long as you make transactions. This is why issuers will deactivate inactive accounts. They are not benefitting from the account if you do not use your card.

#2. Assessment Fees

Cardholder fees and interchange fees fund the costs incurred by the issuer. So, how do credit card networks make money? This is when the assessment charge comes into play.

Each payment network assesses a fixed fee to the merchant for each credit card transaction processed through their network. This fee is used to offset the costs of operating their payment networks.

Typically, assessment costs are a modest proportion of the transaction amount. They may range from 0.13% to 0.15% of each transaction. The assessment cost varies depending on the payment network, as well as the size and type of transaction (credit vs. debit card, etc.).

#3. Processing Fees

Finally, the processor fees are discussed. The merchant’s credit card processing business will charge the merchant for the privilege. Processor fees vary depending on the terms of the contract between the processor and the merchant.

Merchants will often pay a per-transaction fee that includes interchange and assessment costs. The fees will subsequently be passed on to the issuer and payment network through the processor.

Processors will also impose fees to cover their own expenses. If a merchant purchases or rents a payment terminal, the processor will charge an equipment fee. In addition, service fees are frequently charged to compensate the processor’s overhead. Service fees can vary and can be levied per transaction, month, or year.

The processor fees are usually the only ones that merchants have control over when it comes to accepting credit cards. Most merchants are too small to have an impact on interchange or assessment fees. They accomplish this by looking for the processor willing to offer the greatest rates.

Who Benefits From Credit Card “Convenience” Fees?

Many retailers or service providers will charge a “convenience” fee for credit card payments. However, they normally do not profit from these fees.

Most “convenience” fees are simply merchant fees (interchange, assessment, and processor fees) that are passed on to the customer. This is especially frequent with utility providers, such as water or power companies. If you try to pay your taxes with a credit card, you will also be charged this fee.

How to Avoid the Costs of Using a Credit Card

Cardholders make significantly to credit card firms’ profitability. But don’t let that deter you from using a credit card: savvy cardholders may avoid the majority of the charges associated with using a credit card. Many fees, from from interest to incidental fees, can be avoided if you plan ahead of time and spend within your means.

First, make sure you understand the annual charge on all of your credit cards. Then decide whether the annual charge is worthwhile. Do the card’s benefits outweigh the expense of the fee? If you think the annual fee is worthwhile, carefully study your card agreement and make a list of all the potential benefits—then take use of everything the card has to offer.

Avoiding interest is straightforward if you manage your credit card properly: simply pay your account in full each month. If you must carry a balance from month to month, make sure to use the card with the lowest interest rate and pay it off as soon as possible.

Be aware of what you could be charged for and when to avoid extra costs. If you know one of your card cards charges foreign transaction fees, for example, use a different card that does not. Apply the same method to all of your cards. If you’re not sure what fees your card charges, go over your cardholder agreement and make a list of all the probable circumstances that could result in costs.

How Much Money Do Credit Card Companies Make Per User?

According to 2017 data, each active account earns credit card companies an average of $180 per year. Again, credit card companies make the majority of their money through interest and interchange fees per account.

Company Active Cardholder Accounts Interest Per Account Interchange Per Account Total
American Express 62,700,000 $36.93 $60.43 $97.36
Barclays 16,300,000 $180.50 $18.50 $199.00
Capital One 62,100,000 $172.31 $34.09 $206.40
Chase Bank 82,800,000 $118.58 $21.13 $139.71
Comenity 9,589,510 $368.45 $15.25 $383.70
Discover 38,700,000 $191.23 $17.40 $208.63
Synchrony 36,700,000 $243.38 $16.43 $259.81

How Do Credit Card Networks Make Money?

Assessment fees, which are charged for processing a merchant’s credit card transactions, are how Visa, Mastercard, and American Express make money. These are distinct from the previously mentioned interchange costs. The card network—the firm whose logo appears on the bottom right corner of a card—collects a much lower fee known as the assessment fee with each transaction. The cost is 0.14% of each Visa credit card transaction and 0.1375% of Mastercard transactions.


Every year, credit card companies make billions of dollars, mostly from their clients. Unfortunately, many people are unaware of how much of their money is going to their credit card company.

If you use a credit card, you should be aware of the benefits and drawbacks. It is also critical that you manage your resources and budget accordingly in order to pay off your credit card bills as soon as possible.

Fortunately, following the advice above can help you avoid excessive interest and fees, allowing you to save more money for other financial goals.

How Do Credit Card Companies Make Money FAQs

How much does a credit card company make per transaction?

Merchant credit card processing costs range from 1.3% to 3.5% of each credit card transaction. The exact amount is determined by the payment network (e.g., Visa, Mastercard, Discover, or American Express), the kind of credit card, and the business’s merchant category code (MCC).

Who are the most profitable customers for credit card companies?

Customers that purchase frequently and pay their bills on time are the most profitable for credit card companies.



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