How Do Credit Card Companies make their Profit?

1. Interest on Debt

This is the biggest form of profit. With credit card rates nearing 18%, that makes a very profitable rate of return. It is much higher than a standard loan. True, some people may always pay off their debt; but enough people maintain a debt balance on their credit card which can last for several years.

2. Late Fees

Recently, these have come in for criticism from the OFT. But, fees for late payment and missed payment can be costly for the consumer and profitable for the credit card company.

3. Transaction Payments.

These can account for 2.5% of a sale. Ultimately these lead to higher retail prices. Sometimes for rail and plane tickets, credit cards will actually attract a higher price than using a debit card. (A debit card usually has a fixed fee, which is why you can get cash back on a debit card, but, not on a credit card)

4. Credit Card Insurance Schemes

Sometimes credit cards are successful in selling insurance for protecting your credit card repayments. It is best to get one scheme which covers all cards, rather than taking out separate schemes for each card. Just make sure you add any new card onto your existing deal.

5. Minimum Payments.

This is related to the first point about interest on debt. Credit card companies charge a minimum payment which may be 2% of your balance or just £5. However, if you keep paying just the minimum payment you may find the total debt just continues to increase. The interest payment on a £3,000 balance could be over £40 a month. If you are paying only £5, then you will see your total debt increase, even though you may feel you are actually paying it off.

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