Most credit card companies are not predatory, even though they may seem like it if you’re on the wrong side of your credit card debt. The interest rates they charge are almost obscene when you look at the math from your perspective. If you look at it from the standpoint of the credit card companies, they are in business to make money by providing a service.
That may not be predatory, but heartless? Maybe. That being said, if you treated your credit cards like they were a business account, you might see your relationship with credit cards wildly improve. First, you need to understand a few things about credit card companies.
The Two Types of Credit Card Companies
First thing’s first: there are two types of credit card companies. You probably get confused about how Chase and Visa have logos on your credit card.
That’s because Chase, in this case, is the issuer, and Visa is the network. Let’s explain what that means because both make money in very different ways.
- Credit Card Issuer : This is the bank or institution lending you money each time you use the credit card. Every transaction is technically a loan that goes on the issuer’s books until you pay them for the transaction.
- Credit Card Network : Companies like Visa, who you might think of as “credit card companies,” are the ones that provide the payment infrastructure. That means, when you swipe your card at a store, the network allows that money to be exchanged and end up in the store’s accounts almost instantly.
How Issuers Make Money
Issuers make money in a few different ways. The most obvious one is by charging interest on late payments. Issuers typically like to see individuals pay back their balances every month, and interest starts to accrue daily on balances not paid after that month.
Many issuers will offer co-branded credit cards with enticing rewards for qualified users. The companies pay these rewards with annual membership fees.
The interchange fee is another source of revenue for issuers. The percentage of each credit card transaction run through the networks is usually 1-3%.
How Networks Make Money
Networks, on the other hand, charge what’s called assessments. When merchants sign up for credit card service, they will usually see the fees for running credit card payments.
One will be the interchange fee mentioned earlier that gets paid to issuers. The other is a bit smaller, something like 0.13-0.15%, which is the assessment fee.
What You’re Doing Differently
Credit cards are profitable for these businesses as they typically make up some of the largest companies in the world. They make a profit, and they do so according to rules they’ve set up that everyone follows.
When they collect those fees, that shows as revenue on their books. They then use those revenues to grow their business or pay back shareholders in dividends.
For these credit card companies, it’s all just business. However, a few lessons can lead to profitable outcomes if implemented in your credit card usage.
1. Treat Debt Like a Tool
For most credit card companies, debt is a tool. If there is a benefit to the business, they may take out loans to grow it.
For you, debt should be used as a tool as well. When you stop thinking about a credit card like it’s a pool of free money, then you’ll start to make better decisions when you use it.
Here’s another way to think of money – you wouldn’t grab a hammer to use a hammer. If you need to hang a painting, you might use a hammer for one part of that process because a hammer is a tool with a specific use and purpose. You should treat Credit cards in the same way.
2. Use That Tool Regularly
While credit cards have a specific purpose and use, it’s worth mentioning that the most significant way you can profit on credit cards is by getting one with good rewards and benefits.
When you use credit cards responsibly, you can use them regularly on things like groceries and gas for your car. You have to buy these things anyway, so you should be looking for a card that fits your lifestyle and rewards you for doing what you already enjoy doing.
The credit card companies are using debt the same way – they take on debt to gain a profit somewhere.
3. Define How We Should Use Money
We mentioned that you should use it for everyday things earlier, but maybe you have a more specific focus on using your credit card.
Credit card companies do this with those fees you have to pay them. When they collect revenues, those funds have particular purposes, and all of them are there to support and grow the company.
You might have a credit card specifically for expenses you pay for at your place of business. On the other hand, you might have a separate credit card for a trip you have planned. Whatever it is, make sure you have a plan for your credit card.
4. Understand the Risks When Choosing Credit Card Companies
Whenever credit card companies take out a loan for business purposes, they go through a detailed analysis of the risks involved. Corporate accounting is ludicrously complicated, so that we won’t get too complex here.
Suffice to say, whenever you open a new credit card account, you need to understand all of the risks thoroughly. That means understanding all of the fees you are liable for in the various situations you may encounter.
If you are late on your payments, the credit card interest rate could increase above 20% per year, which accrues daily. There are other fees like cash advance fees and annual fees to understand.
5. Interest Will Destroy Your Bottom Line
Speaking of interest, companies will always look for the best possible interest rate before they even seriously consider taking out a loan. Not only that, but they will also consider potential risks to rising interest, such as if the Federal Reserve raises the Federal Funds Rate.
Most corporate investments render a net loss if interest increases by even a single percentage point or two. You should consider the interest you pay in the same light.
Your credit card interest can utterly destroy any returns you make on your investments. If you have even $5,000 worth of credit card debt at a 20% interest rate and make no payments, that can erase returns of 10% on a $10,000 investment.
Paying interest can also harm your credit score. Check out Rocket Credit Scores to find out what yours is and where you need to focus on increasing it.
What’s Next – Improve Your Credit Card Status
Wrapping all of this up, it’s worth it to you to understand how credit card companies make money. Even more so, it’s worth it to know how they use those revenues to grow their company.
If you think of your debt the same way that the credit card companies think about it, you can find yourself on the profitable end of credit card debt rather than buried with interest payments.