Credit card companies make money primarily in two ways:
- Interest charges : When cardholders do not pay their full balance by the due date, they incur interest on the remaining balance, which is a significant source of revenue for credit card issuers. Interest rates typically range from 15% to 25% or higher, generating substantial income from revolving balances.
- Transaction fees (interchange fees) : Every time a card is used for a purchase, the merchant pays a fee to the credit card issuer. This fee, typically 1% to 3% of the transaction amount, is charged to the merchant’s bank and passed on to the card issuer.
Additionally, credit card companies earn money from various fees charged to cardholders , such as annual fees, late payment fees, cash advance fees, balance transfer fees, and foreign transaction fees. These three revenue streams—interest income, transaction fees from merchants, and cardholder fees—constitute the bulk of how credit card companies make money.
