There is a logic credit card companies are always looking for more people to use their services. Credit cards are a huge source of income for issuers. Issuers promote millions of dollars for purchases made by their customers, and they often raise billions in return. The Federal Reserve revealed that as of June 2017, the total credit card debt in the United States was $954.2 billion. Here’s a look at how they make their money.
Credit Card Companies Pay Merchants
When you consider all the billions of daily transactions made collectively by people using Visa, commercial fees, also called transaction fees, are a huge source of revenue for credit card companies. Credit card companies charge savings of approximately 2.3 % to 4.0 % on every credit card purchase. If, for example, you use Visa to pay $75 for a bag of groceries, the store you made your purchase from receives $72 from Visa and the other $3 from your credit card issuer and Visa.
Accumulate On Balance
Bank cards are accumulative or profitable. It means that interest accrues on the balance of your funds – and often, they are comparable to deposit rates. You can save on both debit and some credit cards, which allow you to store money on them at interest. True, the annual maintenance fee for such a card sometimes amounts to more than 2500 dollars. Calculate how much you will earn interest on the balance, and make sure that it will cover the cost of annual maintenance. Banks sometimes set a lower limit on card purchases, such as 3600 dollars a month, which is how considerably you must pay to earn income. The interest rate on such cards may vary depending on the balance in your account. For example, for amounts up to $280,000, you can be charged 12.1 % per annum, and for everything above, only 4.2 %.
Charged Fees
A significant number of card users do not pay their bills in full each month. The unpaid balance on the customer’s credit cards begins to bear interest at up to 12 % or more, which the credit card company collects. Credit card companies are approaching such people with offers that start at attractively low rates but proliferate with late and overdue payments. A 2018 National Bureau of Economic Research (NBER) study published by Hong Ru and Antoinette Schoar suggests that credit card companies may deliberately target people with less educated backgrounds and, therefore, lack financial sophistication and make poor financial decisions. More educated people tend not to use these types of accounts.
Similarly, issuers exhibit irrational thinking through reward programs. Less-educated people tend to receive credit card advertisements that promote higher rewards than those offered to more educated individuals. They come with cool backplates. Not surprisingly, the 2011 Demos study found that households in which someone was unemployed for at least two months in the three years before 2010 were 15.2 % more likely to have card debt than households in which all adult residents had jobs. The same study found that families under 16 were 17.5 % more likely to be in debt than families with no children or children over 18. Finally, the study found that college-educated respondents were 21.8 % less likely to be saddled with debt than those who were only educated in high school. Lending companies know that they get more than half of their profits from less educated clients.
Credit Card Return
Credit card keys mark various fees in addition to their late fees. Some companies include annual prices that customers pay each year to keep their accounts open. These yearly fees vary by the credit card company, with more premium companies charging fees that can stretch into the hundreds of dollars. You pay for the purchase in the store, and the bank returns part of the cost to you. Why does he do it? As a rule, the store pays the bank a commission for each customer who comes to buy. Therefore, the bank does not spend its funds but receives more active users of cashless payments. Another cost, called the book value, is charged when customers transfer debt from one card to another. The fee that receives the debt is assessed. Most companies extract a 2.9 % commission on the transferred balance. Lastly, but not definitively, credit card companies add a 2.5 % to 5.4 % cash handling fee when customers withdraw cash from their credit card accounts.
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