5 Ways Credit Card Companies Can Afford Rewards

5 Ways Credit Card Companies Can Afford Rewards

credit card advice

Mike Randall
By: Mike Randall
Posted: June 26, 2015
Our personal finance experts dish out the most trusted credit card advice on the web, including juicy tips, tricks and secrets from inside the credit card industry.

As you cheerfully swipe your credit card to pay your grocery bill, you can’t help but smile at the reward miles you’re racking up. You say to yourself, “I’m more than halfway to Hawaii, courtesy of my generous credit card company.”

And then somewhere in the back of your mind a little voice wonders, “How can they afford to give me all these great rewards?”

If you’re like many credit card users, taking advantage of all the perks and rewards offered by a credit card company is a challenge gladly accepted. Cash back bonuses, reward miles, even free hotel stays – all of these benefits are what makes you a savvy credit card user.

But have you ever wondered how credit card companies can offer all of these great rewards and not go bankrupt? If that thought has ever crossed your mind, we’ve got the answers for you.

Here are five ways credit card companies can afford to offer you all of those rewards and bonuses.

1. Interest charged on the balances owed

You may be a frugal credit card user who pays off your balance each month, but most consumers aren’t as diligent. With the average interest rate on a credit card currently at around 15 percent, credit card companies make a fortune on interest payments alone.

In fact, last year the total amount earned by credit card companies from the interest they charged was more than $130 billion.

2. Fees, fees and more fees

One of the other ways credit card companies make money from cardholders is by charging fees. There are annual fees for the privilege of carrying a particular card, cash advance fees of up to 3 percent for taking out a cash loan on your card, balance transfer fees for moving money around and dreaded late payment fees that can be as much a $35 or more.

There are even fees for exceeding your credit limit. Luckily, credit card fees are an expense that can usually be avoided by paying your bill on time and not over-extending your credit.

3. Transaction charges

Credit Card Swipe, Transaction Fees

Everytime you swipe, the credit card companies get a little bit richer.

Credit card companies also make money by charging a percentage of the purchase for each transaction made using their cards. This is what’s known as an interchange fee that gets charged to the merchant but is ultimately passed along to consumers through higher prices that retailers charge to us.

In addition, many credit cards charge an additional fee for foreign transactions, so even if they paid for your flight over there, they’re still recouping some of the money every time you make a purchase overseas.

4. Selling information

Recently credit card companies have entered into the business of providing consumer information to marketing and data mining firms. Although they can’t offer specific cardholder details, the data from purchases that we make has a value to aggregators of this information – and the credit card companies are eager to capitalize on it.

5. Marketing partnerships

Credit card companies also make money by selling advertising and promotional deals on behalf of their partners. These might be airlines and hotel chains that pay to have their services marketed to us, or maybe it’s the retailers who pay to have their products inserted into the bill we receive each month.

Whatever the case, the credit card companies will gladly accept a fee for the promotional messages and advertisements they place before us, their customers.

Photo credits: quizzle.com, sayanythingblog.com