Almost all of us have some experience with credit cards owing to their convenience and features. Unfortunately, a lot of consumers fall prey to the high-interest rates and late fees of credit cards. There is no doubt that high-interest rates and late fees are an important part of the business model for credit card companies.
It is imperative to realize that credit card companies exist to earn money. They might appear to be customer-friendly, but the fact is that profit is a top priority for them. The interests of customers come after that. The business model of credit card companies is designed in such a way that they must earn interest to remain profitable even if it comes at the expense of customer welfare.
Therefore, as consumers, it is necessary for us to understand how credit card companies earn money so that we can make smarter financial decisions.
Below you will find Here area list of the main revenue generating sources of credit card companies:
Consumer Fees
Credit card companies charge different kinds of fees to their cardholders, such as late fees, balance transfer fees, cash advance fees, and annual fees.
For instance, you may have to pay balance transfer fees if you want to transfer your amount from one account to another. You may want to transfer your balance to take advantage of lower interest rates. But you will also have to pay 3% balance transfer fees. So, if you transfer $5,000, then you must pay $150 as the balance transfer fee.
Customers are often shocked to discover the excessively high fees that they have to pay. A major reason for this is that they don’t read the terms and conditions.
You should read the terms and conditions thoroughly and ask questions about anything which you don’t understand. Keep in mind that the terms and conditions can vary considerably from one company to the next. So you must read the fine print of each credit card company that you apply to.
Interest
Credit card companies earn a substantial amount of their revenue from high interest rates. Typically, this interest comes from missed payments. Therefore, credit card companies can gain a lot of money when consumers are not responsible with debt payments.
On average, if customers delay the payment of their dues by two months, then they will face a high interest rate of about 28%.
Here is an example to give you an idea of how much interest you can incur with delayed payments. Suppose that you have a $6,000 balance on your credit card which charges an 11.82% APR. With a penalty APR of 28.4 percent, you will have to pay $1,000 more as interest each year.
During 2014, American Express alone earned $5.8 billion via interest. This, of course, comes at the expense of customers.
So a couple of missed payments can lead to substantial interest. You need to take a few steps to avoid missed payments. Here is what you can do:
You should personalize your alert settings on your credit card account so that you receive email and text message alerts before the bill is due every month. Make it a habit to always pay the full amount of your balance when you receive these alerts.
You must also ask yourself honest questions each time you make a big purchase with your credit card. You should ask yourself if you will be able to pay off the full amount when your next bill is due.
If you won’t be able to pay the full amount, then you must postpone your purchase and wait until you have cleared your balance. Once you have paid your dues, you can make your purchase with your credit card.
Merchant Fees
Consumers have the misconception that if they make a purchase with their credit card then the retailer will get the full amount. This is not true.
About 2% or more of the purchase amount is treated as credit card interchange fees. The bulk of this amount goes to the bank that issued the credit card while the rest goes to the credit card association which manages the account.
American Express, on the other hand, takes the full amount of the fees since it issues the cards itself and also manages the accounts. Merchant fees comprise a substantial amount of the revenue stream of American Express and other credit card companies.
This is the main reason why some small businesses don’t accept credit cards. They will get $97 to $98 out of a $100 purchase made with a credit card. If you really want to support your local businesses, then you should pay in cash so that the retailer gets the full amount of the purchase.
Keep in mind that some businesses impose a surcharge on your credit purchases to cover the cost of interchange fees. They will typically charge 2-3 percent extra and show this amount in your receipt.
Some government agencies and utility companies also impose a surcharge if you use your credit card to pay your dues. Try to pay in cash so that you can avoid this extra charge.
Sales Commission
Credit card companies also earn money by selling customer data to third parties – this includes retailers, in particular, that want insights into the spending habits of consumers.
MasterCard and American Express have earned money by using this strategy. MasterCard sells customer data involving ZIP codes so that retailers can gain knowledge about areas that will make more purchases.
Thankfully, the data is anonymous and aggregated in nature. This means that you cannot be identified and neither can anyone find out about your buying habits.
Many consumers are not happy to find out that their data is being sold to external parties even though it is anonymous. As a result, the strategy of selling data is on the decline.
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