The credit card industry makes money off customers primarily in three ways:
- Interest Charges: Credit card companies earn interest on outstanding balances when customers do not pay their full statement balance by the due date. This interest, which can be quite high, is a major revenue source for issuers.
- Fees: Various fees are charged to cardholders including annual fees, late payment fees, balance transfer fees, cash advance fees, foreign transaction fees, and over-limit fees. These fees contribute significantly to the companies' income.
- Transaction Fees (Interchange Fees): Every time a credit card is used for a purchase, the card issuer receives a small percentage of the transaction amount from the merchant’s bank. This fee, often called interchange or merchant discount fee, is charged to merchants but ultimately funded by customers' purchases.
These three streams constitute the core ways credit card companies profit from their customers.
