How Do Credit Card Companies Make Money?

I love credit cards. They are easy to use, have cool designs, and are sometimes made of metal. When I pay off my balance every month, I make money and build credit. With credit cards, they PAY me to use their money. Every other time I borrow money, it COSTS me money. How does this work?

Visa, Mastercard, American Express, and others make money in three primary ways.

1: The credit card companies charge businesses a small fee (between 1-3%) every time the business uses the credit card service. This is why certain businesses have minimum transaction fees and others don’t accept American Express, which typically charges higher fees.

2: They charge annual fees for some credit cards. One example, the American Express Platinum, charges $695 per year. In exchange, card holders get various benefits, deals, and points. This is a small percentage of their income. Future spoiler: I do not believe any credit card that has an annual fee is worth it *unless you can get the fee waived.

3: The main way credit card companies make money is through interest payments on unpaid balances. I saved this for last because it deserves the most attention.

In the fourth quarter of 2022, household credit card debt in America reached a record $986 billion. Assuming an average interest rate of 20% on that debt (which is actually lower than the current average), credit card companies are making more than $197.2 billion per year in interest (not taking into consideration defaults).

The interest on unpaid balances is where credit card companies make most of their money. They use this money for everything including all of the perks they offer. That means everyone who is paying interest on their credit cards is potentially helping you fly first class across the pond on points (assuming you are also not paying interest on credit card debt).

This is the not-so-secret to credit card usage and their free money. If you pay off your balance in full every month, you pay no extra money for all the credit card benefits (unless the business charges more to use a credit card). If you have a credit card that offers 2% cash back and no annual fee, you can use that cash to help pay off your bill. Then, when you pay your hypothetical $1,000 bill at the end of the month, you only pay $980 for the $1,000 total. That is a free $20. If you paid cash for the $1,000 worth of expenses, you spent $1,000.

If you are paying minimum payments on credit cards, eliminating your credit card debt should be your main focus. Your money could be helping someone Uber Eats McDonalds at 2AM. Thankfully, future newsletters will help you eliminate that ballooning debt.

Call to Action:

Check your credit card reward programs and see if there are any benefits you are missing out on! Many cards require you to “opt in” to benefit programs.

Debrief on Deck:

Next week, Mike is going to talk about how you can retire early and the FIRE community. This has no relation to the Fyre Festival. It is real and can actually improve your life unlike cheese sandwiches at a fake music festival.

As always, please reach out to us if you have any questions you want answered. You can reply directly to this email or find us on social media (Twitter and Instagram).

Until then, stay the course.

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