How Do Credit Card Companies Make Money? [Fees and Interest]

We get a lot of value from our credit cards here at Upgraded Points, so you might wonder how credit card companies can turn a profit even while piling on rewards and benefits. The truth is, credit card companies make money even when cardholders come out ahead. 

Credit card companies generate billions in revenue from cardholders in the form of interest and fees: annual fees, interest charges, and late fees, to name a few. But that’s not the only way credit card issuers make money. Credit card companies also make money from merchants with transaction fees, so you still generate revenue for credit card issuers with every purchase you make, even if you use your credit card for free.

Although credit card companies make money from cardholders in one way or another, understanding how credit card issuers turn a profit can help you strategize how to keep more money in your pocket instead of the credit card company’s.

How Do Credit Card Companies Make Money?

Credit card companies such as American Express, Chase, and Discover make money from both cardholders and merchants. From cardholders, credit card companies make money from interest and credit card fees. Transaction fees from merchants are another source of income for credit card companies.

Let’s look at some of the ways credit card companies make money from cardholders:

• Interest Charges — Any time you carry a balance subject to interest, you’ll pay interest charges. You can avoid interest charges if you get a 0% credit card and pay off your balance during the promotional period, or if you pay your balance in full each month. Otherwise, you’re generating interest revenue for credit card companies. Most credit cards have different interest rates for different charges, such as an annual percentage rate (APR) for purchases, another for balance transfers, and another for cash advances.
• Annual Fees — While there are no-annual-fee credit cards available, many cards do have annual fees, including credit cards with some of the best rewards and benefits.
• Late Fees — When you pay your credit card late, even by a day, you’ll be hit with a late fee. And the longer your bill is late, the more you’ll pay in late fees and other penalties including a penalty APR.
• Foreign Transaction Fees — Some credit cards have no foreign transaction fees. But for those that do, you’ll generally pay a 3% fee for any transactions made in a foreign currency or country.
• Cash Advance Fees — If you use your credit card for a cash advance, you’ll pay a 3% to 5% fee for the transaction on top of the interest charges you’ll pay at the cash advance APR.
• Balance Transfer Fees — If you transfer a balance to your credit card, you’ll usually pay a 3% to 5% balance transfer fee, even if the promotional APR is 0%.
• Enhancement Products — While these aren’t as common as interest charges and cardholder fees, enhancement products such as additional insurance add more revenue to the bottom line of credit card companies. 

But it’s not just you the credit card company generates revenue from. Issuers earn money from merchants with transaction fees, including:

• Interchange Fees — Credit card issuers charge merchants an interchange fee with each transaction, usually as a percentage of the transaction of around 1% to 3%.
• Assessment Fees — Some credit card issuers, such as Chase and Capital One, use Visa and Mastercard networks. But American Express and Discover have their own credit card networks and charge merchants an assessment fee for each transaction.

While you might not see these merchant transaction fees come out directly on your credit card statement, you’re still paying for them. Businesses usually consider credit card transaction fees a cost of doing business, so you’ll pay for these fees indirectly when you purchase goods and services. You may pay for these fees directly if the merchant imposes an upcharge fee for credit card transactions.

Can You Avoid Credit Card Interest and Fees?

While credit card companies generate billions in revenue from cardholders like you, it’s possible to limit how much of your money goes to credit card company revenue. You can minimize or eliminate your credit card costs by:

• Being Choosy About Annual Fees — Sometimes annual fees are worth it, and sometimes they’re not. Do the math and be honest with yourself about how much value you expect to get out of a credit card and consider how that stacks up against how much you’ll pay each year to hold it.
• Paying Your Bill in Full Every Month — When you pay your full credit card balance each month, you won’t pay interest charges.
• Paying Your Bill on Time Every Month — Late payment fees and other penalties can add up to large expenses. Set up auto-pay and payment alerts so you’ll never overlook a credit card payment.
• Avoiding Cash Advance Fees — Cash advance APRs and fees can inflate the cost of using a credit card. It’s hardly ever a good idea to take out a cash advance because of the high cost and you may have better options such as a personal loan.
• Using Credit Cards With No Foreign Transaction Fees — If you plan to travel abroad or make purchases in a foreign transaction, a credit card that has no foreign transaction fees can save you about 3%.
• Being Strategic About Balance Transfers — Balance transfers can save you money, but be sure the balance transfer fee is low enough to offer savings over the interest you’d pay if you didn’t transfer the balance.
• Asking for Fee Waivers — Contact your credit card issuer to negotiate fees, especially annual fees. You can ask for a retention offer, which might result in waiving your annual fee for the year. Or if you accidentally miss a payment, ask if you can have the late fee waived. You might not get what you ask for, but it might pay off if you try.
• Negotiating Your Interest Rate — Just as with credit card fees, you can contact your credit card company to ask for a better APR. That can save you a lot of money if you need to carry a balance on your credit card.

Hot Tip: Want to pay less in credit card interest charges? See our guide to negotiating your credit card’s APR.

How Much Do Credit Card Companies Make per Transaction?

Let’s break down a couple of the main ways credit card companies make money on each transaction: fees and interest.

The first way credit card companies make money on your purchase is with merchant transaction fees, which are usually around 1% to 3% of the total purchase. On a $1,000 purchase with a 3% transaction fee, that’s $30.

While $30 might not sound like much, it certainly adds up as U.S. purchase volume is around $4.5 trillion annually. If every credit card purchase had a transaction fee of 3%, that would be $135 million in transaction fees annually.

You might use your credit card for free with a no-annual-fee card that you pay off each month, dodging major fees and interest rates. If so, the revenue generally stops at transaction fees. But what happens if you carry a balance?

Let’s say you make that same $1,000 purchase on a credit card with a 20% interest rate. If you pay just $35 per month — about a minimum payment — it will take 39 months to pay it off and you’ll pay $343 in total interest.

From that single $1,000 transaction, the credit card company may have made nearly $375 in revenue between you and the merchant. That’s not counting any annual fees, and assuming you avoided late payment, balance transfer, foreign transaction, or cash advance fees along the way.

Hot Tip: It’s always preferable to avoid carrying a credit card balance so you don’t have to pay interest charges.

How Much Money Do Credit Card Companies Make?

Credit card companies earn billions of dollars annually. Each year, credit card companies collectively generate $120 billion just in credit card interest and fees, according to the Consumer Financial Protection Bureau. Do the math, and that’s about $1,000 annually in credit card interest and fees from each American household.

Let’s look at 2022 annual revenue from some of the largest credit card companies:

The total revenue of each credit card issuer includes more products than just credit cards, as they all offer additional products such as loans and investments. But these numbers can give you an idea of the scale of revenue each of these companies is operating with.

Who Profits From Interest on Credit Card Debt?

Credit card companies profit from the interest you pay on your credit card. In 2020, credit card issuers raked in $76 billion in interest fees.

It’s not hard to see how credit card companies can generate billions just on interest charges — the average U.S. household with credit card debt revolves over $8,000. If you were to work on paying down that debt at $250 per month, it would take 46 months to pay off and you’d pay $3,290 in interest charges along the way — more than a third of the principal balance.

Do Credit Card Companies Make Money if You Pay in Full?

While credit card interest and fees are where the money really is for credit card issuers, credit card companies still earn revenue from transaction fees, annual fees, and other fees even if you pay your bill in full each month. That’s how issuers are able to make billions in revenue even on cash-back, rewards, and 0% interest credit cards. 

Annual fees help generate revenue from accounts that generally don’t pay interest or other fees. While many cardholders chasing points and miles wouldn’t dream of paying interest charges or late fees, annual fees are more acceptable when cards come with premium benefits and rewards. 

You might come out ahead on annual fees if you make the most of what your card offers, but not everyone does, and that translates to credit card revenue. And some subprime credit cards come with annual fees but don’t offer much or anything in the way of rewards or benefits in return.

If you prefer, you can avoid paying anything to use credit cards — and credit card issuers are completely fine with that. You can get a credit card with no annual fee, pay your bill on time and in full every month, and don’t make any cash advances, balance transfers, or foreign transactions. 

If you can do that, you could use a credit card entirely free, and might even earn rewards along the way. You might think the credit card company doesn’t like customers that never pay fees or interest, but the truth is they’re still profiting from every transaction you make by charging merchant transaction fees.

Bottom Line: Don’t worry about credit card companies making money — they’ll generate revenue even if you maximize your rewards and benefits while minimizing costs.

Final Thoughts

Credit card companies earn billions in revenue each year by charging interest and fees to cardholders along with transaction fees charged to merchants.

As a cardholder, you can minimize the costs of using a credit card by avoiding interest charges and being strategic about which fees you pay, such as paying annual fees only when you can get excellent value from the card that outweighs the cost of the fee.