How Do Credit Card Companies Make Money?

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Approve Borrowers With Terms Based on Their Credit Score

  • Credit card companies approve applicants for rates and terms that change based on their credit scores. For example, should you have excellent credit (e.g., above a 720 score), you will typically receive the lowest interest rate and, possibly, a higher credit limit on your card. Lower credit scores receive higher interest rates and lower credit limits. Should you have only fair or poor credit, many credit card companies will reject your application. Others will approve your request, but offer much higher interest rates and low credit limits ($300 to $500 maximum).

Income From Interest and Finance Charges

  • Often used interchangeably, interest income and finance charges are sometimes a bit different with credit cards. Many credit card companies set different interest rates for different activities. Therefore, income may be a combination of a variety of interest rates and, when added together, become your finance charge for the current month. There are sometimes other conditions, like a "minimum" finance charge, that also may apply. Because most U.S. states require credit card companies to offer a "grace period"--e.g., 25 days, wherein should you pay your balance, no interest is due--many credit card companies mandate a minimum finance charge (e.g., 50 cents or $1) to cover some expenses of producing your monthly statement.

Fees

  • Credit card companies make additional income from their fee structure. These charges, often called "junk fees," sometimes make significant money for credit card companies--and cost you more than your interest rate would suggest. Among the fees charged by some companies: membership fees, late payment fees, over-limit fees and balance transfer fees. When combined with higher interest rates charged for cash advances, overdue payments and exceeding your credit limit, these fees can significantly increase card company earnings.

Selling Products and Additional Services

  • If you have at least one credit card, you're probably familiar with the "inserts" that come in each month's statement. You typically receive "special offers" to purchase any number of third-party products and/or services, including loan payment "protection," life or auto insurance, AD&D (accidental death or dismemberment) insurance or membership in buying clubs that promise the ability to buy products at a large discount in return for a monthly or annual fee. Credit card companies earn more money for every cardholder who purchases these products.

Selling Cardholder Information to Third Parties

  • Recent privacy regulations notwithstanding, many credit card companies sell their cardholders' information to third parties to permit them to market products and services to you. You have the opportunity to "opt out" of this program by telling your card company you don't want your information sold to anyone. But, for those cardholders who don't do this, additional income comes to their credit card companies through this activity.

  • Photo Credit http://rachelchitra.files.wordpress.com/2008/06/credit-cards_69.jpg
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