Chart: How Do Credit Card Companies Make Money?
Students need to understand the business models behind credit card companies as well as other financial service companies. Why? It provides a roadmap for consumers as to how they should use the financial product to AVOID becoming a profitable part of that business model. NerdWallet has a report out about credit card trends, which included this chart showing how credit card companies make money:
Here are the definitions that help to explain the terms in the chart:
Credit card revenue comes from three main sources:
- Interest paid by cardholders who carry a balance from month to month.
- Service fees. These include annual fees as well as charges for balance transfers, foreign transactions, cash advances, late payments, returned checks and so on.
- Interchange fees that merchants pay to accept credit cards — usually 2% to 3% of each transaction.
Questions for students:
- Which of the three main sources of revenue for card companies are paid by consumers?
- Trick question: While merchants pay interchange fees, they typically mark-up their goods to cover that cost which is why you will often see them offer discounts when customers use cash. Ultimately, directly or indirectly, consumers pay for all three.
- Which revenue source is most important for credit card companies?
- How can a cardholder avoid paying interest and service fees to card companies?
- Which source of revenue is growing fastest? What two factors could be influencing that?
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Check out this NGPF Activity: Should They Open A Credit Card Account?
About the Author
Tim Ranzetta
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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