Everyone knows the banks can be quite profitable companies, and that one of their most profitable products that they create is the credit card. They know that consumers will leave balances on their cards and that they will make a great amount of money in interest. This is why they send out six billion credit card offers every year, and that number is rising! Credit card companies actually make their money in a number of different ways, continue reading to learn about fees and charges that some credit card companies charge to you and merchants.
The first and most widely known about expenses is finance charges. Whenever you do not pay your balance off at the end of the month and carry a balance over on a credit card from the previous month, you will be charged a fee approximately one twelfth that of your annual percentage rate in your card holder agreement. Sometimes credit card companies use the twelfth root of your annual percentage rate, depending on how they calculate the fee. Each month you carry over a balance you will be charged a finance charge.
Another major method for credit card companies to make money is with what is called an interchange fee. Whenever a merchant accepts a credit card or debit card as payment, they pay a small percentage, usually about 2% or 3%. Of this fee, the majority of it goes to the card issuers bank, some of it goes to transaction processing network, and some of it goes to the card association (such as Visa or Mastercard). As part of the credit card companies overall income from a customer, interchange fees generally make up about 15% of the money they make off a customer. This number can be much higher if a customer uses their credit card to make numerous day to day expenses such as lunch or snacks.
Credit card companies also charge a number of fees to customers besides that of the finance charge. Whenever you are late on a payment, also known as in default, you will be charged a fee for not making your payment on time. Whenever you charge more than your credit line allows, you will be charged an “over the limit” fee. If you make use of a convenience check or a cash advance, there will also be an additional fee for using one of them. Whenever you make a transaction in a foreign currency, there is usually a conversion fee, which can be up to 3% of the purchase. Finally, there are membership fees to actually have the card on some credit cards and if you are enrolled in some sort of rewards program, chances are you are paying an annual fee to participate in that as well.