Hey Middle Child Money Crew! Ever wonder how credit card companies stay so profitable? Spoiler Alert! It’s not just from annual fees. They have many different income streams to protect their businesses.
Let’s dive into their main money makers – and what it means for your wallet.
Interest Charges - The Big Kahuna
Credit card interest is easily the #1 revenue source for issuers. When you carry a balance, interest charges quickly pile up. According to Value Penguin, the average APR is over 20%! That means owing $5,000 for a year costs around $1,000 in interest alone.
If you need a refresher on what what different credit card lingo means in easy to understand terms check out the Middle Child Money post here:
Understanding the Definitions of Words on Credit Card Statements
The takeaway? Pay your statement balance in full each month to avoid interest charges completely. It’s the #1 way to use credit cards responsibly.
Swipe Fees - A Cut of Every Purchase
Every time you swipe your credit card, the merchant pays a fee – typically 1-3% of the total purchase amount. These “swipe fees” add up quickly across millions of transactions.
While convenient for consumers, swipe fees are a huge expense for businesses – especially smaller ones operating on tight margins. Some merchants like Costco and Amazon even steer customers toward debit to avoid these fees.
Annual Fees - The Visible Cost
Many premium credit cards charge annual fees – often $95 or more. In exchange, you get perks like rewards, insurance coverages, airport lounge access, etc.
Annual fees are an obvious, upfront cost. But they’re often overshadowed by the interest and swipe fees issuers collect. Only pay an annual fee if the card’s benefits outweigh the cost for your situation.
Balance Transfer Fees - A Trap for The Unwary
Credit card companies love it when you transfer balances from other issuers. That’s because they charge a 3-5% balance transfer fee upfront. On a $5,000 balance, that’s $150-$250 right off the bat!
While 0% intro APR periods are enticing, be sure to run the numbers. The transfer fee can negate much of the interest savings, especially on shorter timelines.
Cash Advance Fees - An Expensive Convenience
Need cash in a pinch? Your credit card can front it – for a steep price. Cash advance fees are typically 3-5% of the withdrawal amount, with a $10 minimum fee.
On top of that, cash advances start accruing interest immediately at very high APRs – often 25%+. Unless it’s an emergency, cash advances should be avoided due to their exorbitant costs. Even so there are many other options to access cash in an emergency.
Penalty Fees - Don't Be Late or Go Over Limit
Have you ever missed a payment? You can expect a late payment fee of $25-$35. Go over your credit limit? Another $25-$35 fee. These penalty fees are pure profit for issuers. Check out your terms and conditions that get mailed out to you when you take out the credit card. Be sure you know all of the terms before you jump in or decide to pay late. Setting up automatic payments is a wonderful idea for credit cards.
While single late fees are manageable, they can spiral out of control if you miss multiple payments.
So How Should This Impact Your Card Evaluation?
Now that we’ve covered how credit card companies make their money, let’s discuss how you can be a smarter consumer. We want you to engage you financial journey full informed. The financial journey should be how middle child love life… Peaceful!
1. Avoid Interest at All Costs
Pay your full statement balance every month without fail. Interest charges are the biggest money-maker for issuers – don’t feed into it. You will fall into the Debt Spiral really easily.
2. Understand True Card Costs
Look beyond just the annual fee. Factor in interest costs if carrying a balance, plus any other potential fees like balance transfers. A wise person once told me when jumping into a body of water you have never jumped into before, “Feet First, First time.”
3. Seek Value, Not Just Rewards
Don’t choose a card solely for its rewards program. Ensure the overall benefits justify any annual fees or other costs. Don’t get me wrong. We love using credit cards for their perks, but again have an ironclad strategy before jumping in.
4. Use Credit Responsibly
Make payments on time, stay under limits, and treat your credit card like cash to avoid penalty fees. If you borrow money, you should always pay it back, and according to the determined schedule. This is what being a wise steward of your money looks like.
5. Read the Fine Print
Understand all the rates, fees, and terms before applying so there are no surprises down the road. Again check out the article we wrote on Understanding the Definitions of Words on Credit Card Statements.
Conclusion
By keeping credit card company profit motives in mind, you can be a more educated consumer and avoid overpaying for the convenience of credit. We want the Middle Child Money Crew to be informed. We want your financial journey to be filled with decisions that bring peace and not turmoil. Dave Ramsey does have that right, and while we don’t agree with him on some things we do believe Peace is something we should strive for.
The key takeaway? Credit cards can be powerful financial tools when used responsibly. But credit card companies make billions by catching consumers off-guard with interest, fees, and other charges. Stay informed to keep your hard-earned money where it belongs – in your pocket!
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Disclaimer
The content provided on Middle Child Money is for informational and entertainment purposes only. We are not licensed financial advisors, and the information shared on this blog should not be considered professional financial advice. We encourage all readers to consult with a licensed financial professional to discuss their individual financial situations and needs. The opinions expressed on this blog are solely those of the author, Nate Bradley, and do not reflect the views of any affiliated organizations. Middle Child Money cannot be held liable for any actions taken based on the information provided on this site.
