35

How does a credit card company make any money off of me using their card if there are no fees associated with the card (I don't pay any extra) and I pay off my balance on time every month (so I don't pay any fees ever for this either).

Are they just banking on the fact that many people don't do this and end up owing them money?

56

Credit cards have two revenue streams:

  • They collect a fee, usually 2-3% for each transaction from merchants
  • They collect interest and fees from you.

So yes, the are making money from your daily use of the card.

  • 32
    The 2-3% fee is paid by the merchants, not the customer. – Colen Feb 4 '11 at 5:27
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    @Colen That may be true, but the credit card company is still making money off of his use of the card, even if it isn't collecting the money from him. – KeithB Feb 4 '11 at 13:16
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    @Colen - it is probably rolled into the price of the item, meaning the customer does pay. – MrChrister Feb 4 '11 at 16:07
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    True, but he'd be paying it even if he paid cash, unless the merchant had different pricing for credit cards (which most don't). – Colen Feb 4 '11 at 17:04
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    I realize this is an old Q/A, but now there's a 3rd revenue stream on top of all this - selling your purchase data to advertisers, etc: businessinsider.com/… – BrianH Jan 5 '15 at 15:55
27

They don't make any money off of you personally.

They make money off of the merchants per transaction when you use the card. You trigger this fee to the credit card issuer, but it doesn't come out of your pocket. (Or it shouldn't; merchants aren't allowed to pass this fee on to you.)

They keep you around because you may at some point become less responsible than you already are, and it would be quite costly to get you back (a couple hundred dollars is the cost of acquiring a new credit card customer).

People who are less responsible than you subsidize your free float and your rewards (if any) but the new CARD act makes it more difficult for people to use their cards irresponsibly, so these perks that you enjoy will get less perky with time.

  • 2
    "merchants aren't allowed to pass this fee on to you" -- many gas stations (at least in MA and CT) have different cash/credit pricing. – bstpierre Feb 7 '11 at 3:47
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    If they discount the cash price, that's all right. But they're still not allowed to pass the credit card fee onto you. It's a subtle difference, but doing the latter is against their merchant account agreement. Now, whether the big signs advertise the cash price or the credit price is a gray area. – mbhunter Feb 7 '11 at 8:08
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    Whether a merchant can pass the costs of a transaction on to the consumer, is a regulated by national laws. It's perfectly legal (and common) in Australia to see a "%3 surcharge for AMEX / Diners" signs. – dkam Feb 8 '11 at 23:25
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    @mbhunter Of course, but 1) technically you do pay the fee, as it's factored into the price and 2) the CC company would never have gotten paid if you hadn't made the transaction using their card. Hence why credit card companies offer significant incentives and rewards for using their card. Often times you'll get a bonus just for requesting a second card, say for your spouse or child, because you've potentially doubled the transaction revenue they earn through your account spending. – nick May 28 '16 at 6:52
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    Re. "as it's factored into the price": even if a retailer isn't allowed, and doesn't directly pass the fee on, they will -- implicitly or explicitly -- factor the fees into their prices. It will be a "cost of sale" (in a given % of transactions) and will help determine the price set (for all sales) to achieve the desired profit. – TripeHound Jun 27 '17 at 14:42
12

Of course they make money. They double dip in a lot of instances they make 2 - 3% plus $0.30 per transaction from the merchant and then whatever interest you pay on your card.

So let's just say in one day you make stops at Starbucks for a $4 Latte, then at Wendy's for lunch for about $8, then you put about $20 worth of gas in your tank, then you stop at Kroger for some $40 groceries and may you pick up some dinner for about $15.

That's 5 transactions at $0.30 which is a $1.50 then at 3% starbucks is $0.12, Wendy's $0.24, gas is $0.60 then kroger $1.20 then dinner $0.45 so the total that they get is $4.11 multiply this by about a million people per day that is about $4.1 million per day that they get. That is a nice penny! just from the merchant so you are making them a lot of money by just using it.

  • 3
    I'm in the wrong business! I need to be running a credit card outfit – warren Feb 10 '12 at 19:04
10

Maybe they don't make much, but they make some for sure. In addition to what duffbeer703 says, they also have a warm body at the end of the line and will sell your contact info (or at least access to your eyeballs) to marketers. They stuff advertisements into your bill for example.

If nothing else, you are brand value for them as they can convince merchants (who get charged monthly) that X billion people carry their card and that merchant would be missing out on sales by not accepting their product.

If you have a rewards card that pays you for using it, the merchant has higher corresponding fees.

  • Do merchants actually get charged monthly? All other answers mention a 2-3% charge but no monthly fee for merchants. – Joe S Jun 27 '17 at 11:18
4

Ever wonder why certain businesses won't accept certain credit cards? (The sign above the register saying "Sorry, we don't accept AmericanExpress"). It's because they don't want to pay that credit card company's transaction fees.

One of the roles of the credit card company is to facilitate the transaction process between the customer (you) and the store. And now that using credit cards over cash or check is so ingrained in our culture, it creates extra work for the customer to make purchases at an establishment that is cash-only.

Credit card companies know this, and so do businesses. So businesses will partner with credit card companies so that customers can use their cards. This way, everything is handled electronically (this can also benefit the business, since there's added security as they're not dealing with cash directly, and they don't have to manually count as much cash later).

However a business may only budget a certain amount of their profits they want taken by credit card transactions. So if a company's fees are too high (say AmericanExpress, for example) and they are banking on you already having a Visa card, the company isn't going to go out of its way to provide the AmericanExpress option for you.

If it were free for the business to use a credit card company's service at their stores, then they would all just provide the option for every card! So the credit card company making money is all contingent on you spending your money by using their credit card. You use the card, and the store pays the company for the transaction.

  • There are other costs to accept additional credit cards like administration too. Someone has to set it all up before it will work. Depending on the size of the business and who has to do that setup, it may or may not be worth the hassle if only a few people use that card. Most of those customers will have another credit card too or cash. Hardly anyone has ONLY American Express. – azoundria Aug 21 '18 at 0:08

protected by Chris W. Rea Feb 12 '16 at 13:02

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