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How do credit card companies make money?

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2011-09-19 05:13:50
2011-09-19 05:13:50
How a Credit Card Company Makes MoneyCredit Card Companies make money in a number of ways.

1. Fees (annual fee, overlimit, past due, etc)

2. Interest on the revolving loan if a credit card balance is not paid in full each month.

3. The card Issuer [the bank that issued the card and/or the issuer network ie: Visa, MS, American Express, JCB etc] makes a percentage of each item you purchase from the merchant who accepts your credit card. These rates range from 1% to 4% of each purchase.

4. Last, the cardholder can make additional money through other means, such as selling your name to a mailing list or sending advertisements in your monthly bill. (Due to regulation, this is becoming less frequent)

Credit card issuers accumulate expenses that you may not have considered. They often pass those expenses along to you through interest rates, annual fees, and late charges. The biggest rick expense credit card issuers face is the loss of money lent to other cardholders.

Because most credit cards are unsecured, if a person decides not to pay their debt, there is little a credit card issuer can do to get their money back. Often its more expensive to try to collect the money than write the bad debt off. That being said, late payment or a decision to not pay at all will adversely effect the cardholders credit rating.

Credit card issuers must also justify the investment by making at least as much interest as they could make investing in real estate, bonds or other securities. Because of the risk of loaning money via a credit card, you may notice that credit card issuers typically charge higher interest than regular loans. Most credit card holders feel the higher interest is worth the convenience of using a credit card.

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