How do credit cards make money if you pay in full?

Credit Card Profits: Unveiling the Revenue Stream Beyond Interest

While it may seem counterintuitive, credit card companies can generate substantial profits even if cardholders consistently pay their balances in full. This revenue stream is driven by a hidden but significant fee: the interchange fee.

What is the Interchange Fee?

The interchange fee is a processing charge that merchants pay every time a credit card is used. This fee is assessed by the card issuer’s network (e.g., Visa, Mastercard) and a portion of it is shared with the credit card company.

Revenue from Full Repayment

When cardholders pay off their balances in full each month, they avoid paying interest charges. However, the interchange fee remains a source of income for the credit card company. This is because the fee is based on the transaction amount, regardless of whether interest is incurred.

For example, let’s say a merchant makes a $100 sale and the interchange fee is 2%. The merchant would pay $2 to the card issuer’s network, and a portion of that fee would be shared with the credit card company.

How Much Profit Do Credit Card Companies Make?

The interchange fee typically ranges from 1.5% to 3% of the transaction amount. While this may seem like a small percentage, it can add up to significant revenue for credit card companies. For instance, if a credit card company processes $100 billion in transactions per year with an average interchange fee of 2%, it would generate $2 billion in revenue.

Other Sources of Revenue

In addition to interchange fees, credit card companies can also generate revenue from:

• Late payment fees
• Over-limit fees
• Annual fees
• Balance transfer fees

Conclusion

Contrary to popular belief, credit card companies can profit handsomely even if cardholders pay their balances in full. The interchange fee, a hidden processing charge paid by merchants, provides a steady revenue stream that underpins the card issuers’ business model. By understanding this revenue mechanism, consumers can make informed choices about their credit card usage and avoid unnecessary fees.