Why do credit card companies offer credit cards? (And why using credit cards doesn’t need to be as scary as it seems)
The short answer, as you probably guessed, is credit card companies offer credit cards because they make money doing so.
You’ve probably received an ad in the mail from a credit card issuer telling you not only are you pre-approved, but that you could make up to $500 by opening their credit card. It goes out with the rest of the junk mail of flyers and coupons, as you assume there is a catch. Well, there probably is, but not all of these offers are too good to be true. While there is a decent chance you’ll end up paying something to have this credit card either in the form of interest or an annual fee, not all of the money is coming out of your pocket.
Credit card companies make most of their money in three simple ways:
Interest fees charged.
Cardholder fees.
Merchant fees.
Interest Fee Charges
What to know about interest fee charges: Interest charges, which most of us are all too familiar with, is the main revenue generator for credit card companies. You buy something for $100, don’t pay it off in time, and eventually ends up costing you way more. There is little regulation around the interest rates charged, and typical rates hover around 17 to 23 percent.
The good news is that this major cost to using credit cards can be completely avoided if you make sure to pay off your credit card at the end of each month to avoid accruing these fees.
What to do about interest fee charges: Never “carry” a balance - to truly game the credit card system it’s imperative that you pay off your balance at the end of every month.
Membership or Card Holder Fees
What to know about membership or card holder fees: Fees are another way companies make money. I’d go as far to say that i think some of these providers have an entire Fees Invention department, finding new ways to add new lines onto your monthly statements.
Here are a few common credit card fees charged to consumers:
Late payment fees
Cash advance fees
Balance transfer fees
Annual fees
The good news is, like interest charges, most of these can be avoided. Late fee? Don’t pay late. Cash advance fee? Don’t advance cash to yourself. Balance transfer fee? Well, you get it by now.
The last fee is one that you can easily avoid, but sometimes may not want to, annual fees. While not all providers have cards with annual fees, most offer various tiers of cards with the higher tier having increased benefits, and therefore increased costs.
If you want a simple credit card that gives you 1 or 2 percent back on your spending then almost every issuer has a no-annual fee card that would be right for you. If you are looking for a card that gives you 3 to 5 percent back on popular spending categories like travel or dining, you’re likely going to need to pay for entry to enjoy. More on that later, but it's important to pick the cards that are right for you.
What to do about membership or card holder fees:
Make sure you know all of the fees that your selected credit card charges.
Setting up auto payments
Don’t take action that you will be charged a fee against (unless you’ve decided the membership fee is worth it).
Understanding Merchant Fees
The last main stream that issuers profit on are referred to as interchange or merchants fees. As you can guess, these are the fees that the merchant is charged to allow you to use your card at their shop. Most businesses are happy to pay these fees (typically 1.5 to 3 percent) for a variety of reasons. The funds transfer seamlessly while the card issuer does most of the legwork, tracking of funds is easier to control for reporting, and who carries cash anymore? While your local diner (the one that isn’t only ironically ‘50s themed) may opt for the cash path, most businesses have made the switch to electronic payments.
So now we’ve gone through the ways that credit card companies make money. If you’ve already figured it out by now, there is an easy path to not only getting a credit card without paying fees or interest charges, but making a percent or two along the way. While it may sound easier than it really is, by controlling your spend and having a plan to pay off your monthly credit card bills, maybe it's you that can make some money along the way.
