Credit card Q&A: “How do credit card companies make money?”

Credit card companies make money in a variety of different ways. The first and most obvious way is via consumer-related fees.

We’ve all paid late fees, over-the-limit fees, and so forth. Credit card companies make a ton by charging fees for all types of different slip-ups made by us cardholders.

For example, your credit card issuer may charge you for making a late payment or going over your limit.

Here is a list of common fees charged by credit card issuers:

- Late payment fee
– Over-the-limit fee
– Pay-by-phone fee
– Balance transfer fee
– Annual fee
– Return payment fee
– Return check fee
– Cash advance fee
– Foreign transaction fee
– Finance charges

Most of those fees are self-explanatory. The last one on the list, finance charges, refers to the money credit card companies make by charging you interest on your purchases.

The higher your APR, the more they make in finance charges. If the APR on your credit card is 20%, and the associated balance is $5,000, they’d rake in $1,000 annually (using simple math).

Credit card issuers and payment processors like Visa and MasterCard also make billions annually in interchange fees, which are essentially transaction fees.

It works like this: When you make a $100 purchase, the merchant will actually only receive around $97.50, with the remainder being split between Visa/MasterCard and the card issuing bank, such as Citibank, Bank of America, or Chase, just to name a few.

These fees drive up prices for consumers, whether they pay with cash or plastic, and explain why banks are so eager to issue more and more credit cards.

Read more: The cost of credit card use.

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