Credit card companies make money in several ways.

You know about the annual fees and the different transaction fees

Then there’s also money to be made in upselling.

But the worst of them all are the interest charges.

Whenever consumers make purchases on their credit cards, and don’t pay the balance on time, they are charged high interest rates on the outstanding balance.

And while you may think “That would never be me! I would never pay interest on a credit card” – a study published late last year showed the average Canadian has just over $22K in consumer debt…most of which is credit card debt.

The good news? If you know how a credit card company is making money, you can better prepare yourself to avoid these fees altogether.

Money From Fees

A very common way credit card companies make money is from the fees they charge for various situations.

A good example is an annual fee.

Most rewards cards have an annual fee attached to them and this fee can range from $13 to $900, depending on the card.

When choosing a credit card you’ll want to make sure the rewards you expect to receive each year are higher than the annual fee, otherwise the card likely isn’t worth it. An exception would be a card that offers lucrative rewards in other forms, such as a flight voucher.

Take the for instance. This card has an annual fee of $120, but it also offers a companion voucher annually that allows the cardholder to purchase a companion fare starting at $99 (or higher, depending on the destination). It also allows for your first checked bag to be free.

I have this card and I actually don’t spend enough on it to recoup the annual fee. However, I do save approximately $500 per year on flight costs and checked bag fees so for me, it’s worth keeping.

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.

Another option to avoid an annual fee is to negotiate with the company to have the fee waived.

To successfully negotiate to have your fee waived, keep the following in mind:

  • Mention things that make you a more valuable customer such as having the card for a long time.
  • Point out there are other comparable cards on the market with better offers for new customers (assuming there are).
  • Be polite, do your research and don’t be afraid to ask – the worst they can say is no.

Other fees include:

Cash Advance Transactions

The fee associated with cash advances is usually a % 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, no grace period, and if you’re withdrawing 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 that you can access cash if you need it right away.

Dishonored Payment Fees

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

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

Foreign Exchange Fee

Foreign exchange fees get 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%.

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

Tips to avoid foreign exchange fees:

Related: Canadian Credit Cards With No Foreign Transaction Fee

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Money From Transactions

Credit card companies also make a small percentage of money from each transaction a cardholder makes.

Credit card companies charge merchants a fee each time a customer uses their card. This fee can vary by company (and merchant), and it usually averages around 1.5%. Meaning, when I buy something at a store for $100, while I might be getting 2% back in rewards from the credit card company, they could be getting 1.5% from the business where I’m shopping.

Small businesses get hit hard the most as they usually don’t have the negotiating power of a larger, national retailer. Premium rewards cards typically have the highest percentages and cost merchants the most, which is why some merchants will accept some cards but not others.

While there isn’t anything you can do to avoid credit card companies making money from transaction fees, here’s what you could do:

  • You could carry some cash for when you’re shopping at any small “Mom & Pop shops.”
  • You can make sure you choose a credit card that gives you the highest value for your money spent.

Take the which gives you up to 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 places. (Even Costco will take this one!)

Related: Debit vs. Credit: Which Card Is Better?

Money From Upselling

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

Within most credit card agreements is what’s called a “consent to collect,” which gives the company the right to collect your personal information. While this can be tough to avoid completely, some cardholder agreements do have an option to withdraw consent which means you don’t agree to your personal information being shared or used for marketing purposes.

Money From Interest

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 usually 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

The best way to avoid paying interest?

Make sure you always pay the balance due at the end of each billing cycle.

Here are some ideas how:

  • Automate the process. If you are the forgetful type, there are ways to automate this process and have the balance come out of your account at the end of each billing cycle (although this isn’t available with every credit card).
  • Set up electronic alerts for most cards to automatically let you know when your payment is due.
  • A good rule of thumb when using credit cards if you don’t have the cash to make a purchase – don’t make it. 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 already.

If you do tend to carry a balance? Having a low interest rate credit card is an option.

The comes with a low interest rate of 8.99% – over 10% lower than most. With no annual fee, you get that same low interest for cash advances and balance transfers as well.

Another alternative, is the which comes with a permanently low interest rate as low as 8.90%. This card does have an annual fee of $35, but because it’s a Mastercard, it is more widely accepted compared to the Amex Essential above.

Then there’s also with a low interest rate of 11.9% and a promotional balance transfer rate at 3.99%.

The More You Know

Know what you’re getting yourself into by reading your cardholder agreement.

Because when it comes to many things in life, what’s included in the fine print makes a big difference.