If you’re smart, there are ways to avoid these fees. Read on to learn more about how credit card companies work, how they profit from cardholders, and tips for reducing credit card costs.
How do credit card companies work?
"Credit card companies" is an umbrella term that encompasses both credit issuers and credit networks.
Banks and credit unions are the financial institutions that actually hand out credit cards. Some prominent credit unions include Chase and Citi. When using a card, you’re borrowing those funds from your issuer and must make monthly repayments to them.
Credit networks refer to the organizations that process credit card transactions, such as Visa, American Express, and Mastercard. These networks ensure that they charge the correct cardholder and deliver an accurate bill statement.
Once you purchase something with your card, the money moves to the credit issuer, then through the network for processing, and then is sent to the bank for payment.
Credit card companies make money doing business with consumers, and the networks earn money by dealing with the merchants you make purchases from.
7 ways credit card companies profit from cardholders
Consumers play a big role in how credit card companies generate their wealth. Many companies charge processing fees on credit card payments, whether they’re paid by the consumer or the retailer. Merchant fees aren’t your concern as the cardholder, but credit card issuers usually still charge cardholders transaction fees.
One: Interest charges. Interest payments are one of the main ways credit issuers turn a profit, especially since these costs can quickly compound if you don’t pay off your monthly bill.
This is avoidable if you pay off your credit card balance in full, but if you make a late payment or miss one entirely, credit card companies profit from the interest fees.
Two: Cash advance fees. This fee arises when you use your card to withdraw cash from an ATM. Withdrawals typically come with a minimum charge.
Cash advance fees range between two and five percent.
Three: Balance transfer fees. A balance transfer credit card is one way to handle your outstanding debts. You can transfer most of your debt onto a different credit card that comes with a lower interest rate, usually around three to five percent. This allows you to pay off your debts quicker. Remember that not every balance transfer card comes with a subsequent fee, but many do. Check the terms of your contract to know how much you’re paying.
Four: Annual fees. Most credit cards have an annual fee that covers the cost of you using the card from year to year.
Five: Late fees. Missed or late payments due can result in late fees. To avoid this, you must pay at least the minimum fee on your credit card balance. This fee is waivable in some cases, but it depends on your card issuer. This behavior negatively impacts your credit score.
Six: Foreign transaction fees. Usually, this only applies to purchases made outside the United States, such as when you’re on vacation.
Seven: Over-limit fees. When you exceed your predetermined credit limit, you will face a financial penalty alongside a drop in your credit score. Credit utilization accounts for 30 percent of your credit score.
How can a cardholder cut the costs?
Despite the potential fees associated with credit cards, there are always ways to save money.
Tip #1: Pay on time. Prioritizing your monthly payments and ensuring you don’t miss their due dates will keep money in your pocket. The best method is setting up pre-authorized payments online so that you never miss one.
And, by paying off your credit card bill in full, you’ll dodge those nasty interest fees.
Paying in a timely fashion, especially for a prolonged period, will greatly influence your credit score. Payment history is the largest determining factor regarding credit score calculations, accounting for 35 percent.
Tip #2: Keep an emergency fund. Having a portion of money reserved for those unexpected life moments can significantly ease the stress of making payments. Being proactive helps you save in the long run and can potentially keep you from taking out a loan to cover extra costs.
Tip #3: Opting for a more affordable credit card. Despite the many mandatory fees that come with owning a credit card or two, there are many card types out there that make it worth your while with financial incentives like rewards cards and lower credit card interest rates. Don’t be afraid to do some research before applying for a card.
That said, one wonderful tool for you to consider in your hunt for the ideal banking card is Point Card.
You don’t want to spend more money than is necessary and you deserve to focus your time and effort on achieving goals that truly matter, rather than on credit card fees.
Created as a transparent, easy-to-use alternative payment method, Point Card allows cardmembers to exercise fiscal independence. Spend your own money and also receive exclusive benefits. These include unlimited cash-back and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shop purchases.
Alongside Point’s rewards program that helps you build your wealth, Point also comes with multiple security features to help protect your money. Fraud protection with zero liability, car rental and phone insurance, two free ATM transactions each month, and no interest fees are just some of these perks.
You work hard for your money, and Point works equally as hard for you in return.
Made to spend.