How Credit Card Companies Make Money

If you regularly pay off your credit card balance and avoid interest charges, you might wonder how credit card companies make money and stay in business. Aside from interest, these companies make money by charging various fees and upselling other credit products.

There are a few ways to avoid paying these fees and to put a stop to the upselling, but it mostly boils down to paying attention to details and being proactive. You can start by choosing a low interest credit card and automating your monthly payments.

This review breaks down how credit card companies bring in money, helping you spot and avoid paying those unnecessary fees.

1. Money from fees

A very common way credit card companies generate revenue is through fees, and the most obvious example is an annual fee.

Most rewards cards charge an annual fee, ranging anywhere from $13 to $900, depending on the card.

When choosing a credit card, make sure the rewards you expect to get each year are higher than the annual fee. At the very least, check that the perks and benefits offered by the card outweigh the fee. Otherwise, the card likely isn’t worth it.

Take the WestJet RBC World Elite Mastercard for instance. This card has an annual fee of $119, but if you spend a minimum of $5,000, you gain access to a companion voucher that allows you to book round-trip travel for a guest on a reduced flat fare. If you take advantage of this perk, you can save the equivalent of your annual fee (or more) in flight costs alone. Plus, this card also offers you (and up to eight guests booked on your card) free checked bags – another opportunity to offset your fee. And that’s before you even factor in money saved by cashing in on WestJet rewards.

With that said, sometimes annual fees are not worth it, and you would be better off going for a credit card that has no annual fee.

Other credit card fees to take note of include:

• Cash advance fees
• Dishonoured payment fees
• Foreign exchange fees

Cash advance transactions

The fee associated with cash advances is usually a percentage of the money taken as a cash advance.

To avoid this fee, never use your credit card for cash advances or cash-like transactions. These transactions come with fees, very high interest rates, and no grace period. Additionally, if you withdraw from an ATM, there may also be a network ATM fee.

Tip to avoid cash advance fees: Set up an emergency fund in a separate bank account so you can access cash quickly if needed.

Dishonoured payment fees

A dishonoured payment fee is charged for any payments not honoured and is typically around $50 per transaction.

A dishonoured payment could occur if you set up an automatic payment and the money isn't there. Or if a bank needs to return a cheque or refuse a pre-authorized debit payment.

Tip to avoid dishonoured payment fees: Always make sure there is enough money in your bank account to cover the amount due.

Foreign exchange fee

Foreign exchange fees are charged when you buy something in a foreign currency using your card. You are charged the current spot rate and an additional percentage, usually 2.5%.

Some credit cards charge a little less, and a few that even waive that fee altogether ‒ but these cards are few and far between on the Canadian market right now.

Tips to avoid foreign exchange fees: Avoid making large purchases on your card when travelling, and/or choose a credit card that doesn’t have a foreign currency fee.

2. Money from transactions

Credit card companies charge merchants a fee each time a customer uses their card. This merchant fee, also known as a processing fee, can vary by company and merchant, ranging from approximately 1.5% to 3% or more.

Because of these fees, purchasing something for $100 means that while you may get 2% back in rewards, the credit card company could be getting 1.5% or more from the business where you're shopping.

Premium rewards cards tend to have higher transaction costs for the businesses, which is why some small businesses can't afford to accept them.

Tips to avoid paying transaction fees

There's not a lot you can do to avoid credit card companies making money from transaction fees. But there are a couple of things you can do to take a bit of the sting out of them:

• Carry some cash for when you're shopping at any smaller local businesses, and help them avoid credit card transaction fees entirely.
• Choose a credit card that gives you a solid return on your spending, whether that's in the form of cash back or travel rewards. For instance, the Tangerine Money-Back Credit Card gives you 2% cash back on your purchases. And because it's a no fee Mastercard, you don't need to worry about it not being accepted.

3. Money from upselling

Another way credit card companies in Canada make money is by collecting and using your personal information internally to sell you more products and services.

Within most credit card agreements is what’s called a "consent to collect," which gives the credit card company the right to collect your personal information.

Tips to avoid upselling tactics

While this can be tough to avoid altogether, some cardholder agreements do have an option to withdraw consent. This means you disagree with your personal information being shared or used for marketing purposes.

4. Money from interest charges

The most well-known source of revenue for a credit card company is the interest charged on any balance owing. The interest rates on a credit card are quite high, often in the 20% range, and can quickly cancel out any rewards earned.

While you might not think credit card interest is all that bad, check out this interest calculator to find out how much extra money you could be spending over the course of your debt.

Tips to avoid paying interest on your credit card

Not interested in helping credit card companies make money? Then you should do everything you can to avoid paying interest on your credit card.

And the best way to avoid paying interest is simple: make sure you always pay the balance due at the end of each billing cycle.

Here are some ideas on how:

• Automate the process: If you are the forgetful type, there are ways to automate this process and have the balance deducted from your account at the end of each billing cycle. This can be done either via your online account with the credit card or through your chequing account's online banking portal.
• Set up electronic alerts: Most cards automatically let you know when your payment is due. It's usually a feature that you can turn on when you're logged into your online account or mobile app.
• Don’t make purchases if you can’t pay for them: Credit cards should not be seen as extra income. Instead, they should be treated as a secure, convenient, and rewarding way to make purchases you were planning to make anyway.

If you find your card's interest rates are far too high, here are a few low interest card options to consider:

Card	Annual fee	Welcome offer	Interest rates	Apply now
MBNA True Line® Mastercard®	$0	$135 GeniusCash + 0% interest on balance transfers for 12 months (terms)	Purchase rate: 12.99% Cash advance rate: 24.99% Balance transfer rate: 17.99%	Apply now
Scotiabank Value Visa Card	$29	0.99% interest on balance transfers for 9 months (terms)	Purchase rate: 13.99% Cash advance rate: 13.99% Balance transfer rate: 13.99%	Apply now
Desjardins Flexi Visa	$0		Purchase rate: 10.9% Cash advance rate: 12.9% Balance transfer rate: 12.9%	Apply now
Scotiabank American Express® Platinum Card	$399	$175 GeniusCash + Up to 60,000 80,000 bonus points (terms)	Purchase rate: 9.99% Cash advance rate: 9.99% Balance transfer rate: 9.99%	Apply now

FAQ

What is the main way credit card companies make money?

Credit card companies make most of their money by charging interest on cardholders’ balances. They also generate funds by upselling credit products and by charging various types of fees, like annual fees, transaction fees, and overdraft fees.

How do credit card companies make money if you don't pay?

Just because you don’t pay doesn’t mean card companies stop charging fees and interest. Eventually, companies might send your account to collections so they can recoup the money you owe. Plus, they still make money on other transactions.

How do credit card companies make money on 0% interest?

If you’re a diligent cardholder who consistently pays off your credit card in full, the company is still profiting from other fees and transactions. Many people carry balances as well, which means credit card companies make a profit.

How do credit card companies work?

Credit card issuers extend credit to cardholders who borrow against their personal credit limit. Card issuers collect annual fees, fees for additional cardholders, late payments, overdraft fees, and charges for services like cash advances or balance transfers.