How Do Credit Card Companies Make Money?

[Anonymous]

I thought that the general idea with credit cards was that when you charged a purchase on the card that the vendor/seller paid a fee to the credit card company? So I am confused when credit card companies say that they cannot be profitable without all the "creative charges" they attach to some accounts. I have four credit cards, two store cards and two master cards. I don't carry a balance on any of the cards so I do not pay interest (I have reformed in the last four years) and on the two major cards I earn 1% cash back.

So my questions is: Are my account profitable for the credit card companies?

[BungalowMo]

Your accts may not be...but believe me, lots of folks out there are making up for it!

[GregB]

As a vendor that accepts credit cards I pay lots of fees. There is a monthly fee and a percentage of each sale. This varies according to the charge. I pay a higher fee for mail order (where the card isn't swiped). I pay a fee according to the average charge amount, so someone with lots of small charges like a restaurant will pay a higher percentage. I pay a higher fee for rewards cards, etc.

This adds up to an average of 3.2% for me for all transactions. This is about 40% higher than it was 8 years ago.

So if I add up all the money I spend on credit cards, the 3% that the credit card companies are getting on the purchases is certainly more than the amount that I pay in interest on any balances that I carry. Obviously many people never carrry any balance and pay no interest and there are others that pay interest on just about everything.

Like any business, the goal is to make a profit overall. Making or losing or breaking even on certain parts of business is the way it works in business.

[Anonymous]

They make money from people who over spend and pay late. 

[Anonymous]

There are any number of "profit centers" for credit cards.

1.  Merchant/vendor discounts.

2.  Annual Fees

3.  Service/Transaction fees (BT, Cash Advance, etc)

4.  Interest Charges

5.  Vendor Specials.  (When you see a credit card promoting a particular product, service or company, you can rest assured that this company has an agreement to pay higher than normal discounts and fees to the CCC than standard for merchants/vendors).

6.  Late Fees

7.  Over Limit Fees

There are some CCC's (subprime) who also charge:

8.  Program fees

9.  Membership fees

10.  Higher than average annual fees

11.  Statement fees

12.  Higher than average interest rates

It also depends whether the CC is a major bank/ccc backed card or a store card.  Store cards often pay higher or additional fees (the store) to the CCC.

Then we can look at "products" the CCC's sell such as:

13.  Disability, unemployment and credit life insurance.

14.  Affiliate sale of credit monitoring, ID protection

15.  Offers for sale of products (statement stuffers)

16.  Offers for various other insurance (life, disability) other than card protection plans

17.  Promotion and cross sales of other financial services (auto, home, personal, depository accounts)

 This is by no means an exhaustive list, but it makes the point that there are many profit centers for CCC's.

[nothingman02]

"How Do Credit Card Companies Make Money?"

Wow! Poor credit card companies and banks....gee.. how do they make money!!

[KingAdrock]

The CCC's claim that they can't be profitable on vendor fees alone, but I think that's a bald faced lie. Mainly they've been living high off the hog collecting tons of interest, annual fees, BT fees, late fees, over the limit fees and we-just-feel-like-charging-you fees. So just going back to vendor fees alone scares them. But honestly if they truely can't, they don't deserve to stay in business.

[Anonymous]

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@KingAdrock wrote:
The CCC's claim that they can't be profitable on vendor fees alone, but I think that's a bald faced lie. Mainly they've been living high off the hog collecting tons of interest, annual fees, BT fees, late fees, over the limit fees and we-just-feel-like-charging-you fees. So just going back to vendor fees alone scares them. But honestly if they truely can't, they don't deserve to stay in business.

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This is partially true, depending on how the CCC's are trying to position themselves.  Most CCC's are banks or finance companies who either:

1) borrow money from depositors

2) borrow money through securities, bonds and sale of stock (capitalization)

3) borrow money from other financial firms

Depending on how much money they have on deposit (costs them the savings & cd rates of return), the amount of debt they carry in bonds, other securities and loans, their profit is not a straight line linear extrapolation of how much interest they charge (as a percentage in APR), but what their TOTAL NUT costs are versus their TOTAL GROSS REVENUES.

This is why money gets cheap when they have an abundance of deposits and capital.  They need to place it, because they lose money that "sits on the shelf" due to interest they pay, and the cost of inflationary loss in money.

Many of the Big Banks were bloated conglomerates with tons of branches, corp head quarters and "overhead."  In the end they weren't making enough money to go around without the "creative" revenue generation which is what lead many/most into the subprime behemoth crisis we now see.  The greed need of profits pushed them to make very questionable, short term gain decisions that the mid/long term consequences finally came a calling and the piper wanted to be paid.

Total real dollars out vs. total real dollars in.  That is what they boil it down to, not you as an individual or an account.  They look at how they can make across the board or major moves that have major bottom line impacts.

[Anonymous]

Nice job, txjohn! +1

[Anonymous]

Thank you for all the posts and explainations.