How Credit Card Companies Make Money: Interest, Fees, and Merchant Costs

Many credit cards cost nothing to open, and some even pay rewards. So where does the money come from? Once you see how credit card companies make money, the fine print on a card offer starts to make a lot more sense.

In general, card money tends to come from three places. There is interest charged on balances that are carried, there are fees, and there are costs that stores pay when you swipe. Learning how credit card companies make money simply helps you see the whole picture, with no blame, so a card works the way you want it to.

This guide explains each piece in plain words, with small made-up numbers you can check. It shares general information only, and it is not advice or instructions. The guide is written with the United States in mind, and every card agreement is different. Move through it one section at a time, at whatever pace feels right.

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Three main streams of card money

A card company is often called the issuer. That is the bank or credit union whose name is on the card and that lends you the money. When you buy something, the issuer pays the store, and you pay the issuer back later.

Issuers often earn money in three broad ways. The first is interest, which is the cost of borrowing when a balance is not paid in full. The second is fees, such as a yearly fee or a late fee. The third is a share of the costs stores pay to accept cards.

How much each stream matters can differ a lot from one company to the next. This guide does not claim to know how any one company runs its business. It simply shows the general pieces many people see on their own statements.

Write the three words interest, fees, and store costs on a sticky note and keep it near your card statements.

How interest works on a card balance

Interest is charged on money you still owe after the due date passes. Many cards offer a grace period, which is a stretch of time when new purchases do not collect interest if the full balance is paid by the due date. The card agreement explains whether a card has one and how it works.

Card rates are usually shown as an annual percentage rate, or APR. That is the yearly cost of borrowing shown as a percent. Here is an example with made-up numbers. Say a card has a made-up APR of 24 percent. Divide 24 by 12 months and you get 2 percent a month, as a rough guide.

Now say $600 is carried past the due date. Two percent of $600 is $12. So in this simple made-up example, about $12 of interest is added that month. Real cards often figure interest daily on the average balance, so actual numbers will differ. For related reading, see this page about credit card debt.

Find the APR on one card statement and circle it so it is easy to spot next time.

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Why a minimum payment can stretch a balance

The minimum payment is the smallest amount the issuer accepts by the due date without calling the payment late. It is often a small slice of the balance. Paying it keeps the account in good standing, and yet the balance may shrink slowly.

Here is a made-up example. Say the balance is $1,000 and the made-up interest for the month is $20. If the minimum payment is $30, then $20 of it covers the interest. Only $10 goes toward the $1,000 owed. The next month, the balance is $990, and the cycle starts again.

Many statements include a box that shows how long payoff could take with only minimum payments. It can be eye-opening. Feeling surprised by that box is very normal, and a nonprofit credit counselor can talk through options if a balance feels heavy.

Look for the payoff box on your next statement and write down the two numbers it shows.

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The fees that may show up on a statement

Fees are a second stream. Some cards charge a yearly fee just to keep the card open. Others have none. Common fees may also include a late fee, a fee for a cash advance, which is using the card to get cash, and a fee for a balance transfer, which is moving debt from one card to another.

Some cards add a fee for purchases made in another currency. Others may charge a fee when a payment is returned. Not every card has every fee, and the amounts vary by card and by issuer.

Cash advances often work differently from purchases. Many cards start charging interest on them right away, with no grace period, and the rate may be higher. The card agreement is the place to check how each one works on a given card. You may also like this page on using credit with care.

Scan the fees section of one card agreement and list every fee name you find, without worrying about amounts yet.

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What stores pay when you swipe a card

The third stream is one most shoppers never see. When a store accepts a card, it usually pays a processing cost on each sale. This is often a small percent of the sale, sometimes with a few cents added. The total is split among several parties.

Here is a made-up example. Say you buy $100 of groceries, and the store pays a made-up 2 percent to process the card. Two percent of $100 is $2. The store keeps $98. Part of that $2 often goes to the card issuer, part to the card network that moves the payment, and part to the company that runs the store’s card machine.

Real costs vary by card type, store type, and the way a sale is made. Some stores build these costs into their prices. Some offer a lower price for cash or debit where that is allowed. Rules about this differ by place.

Next time you shop, notice whether a store posts any sign about card costs or cash prices.

Who is who in a single card swipe

A single swipe can involve several companies at once. The issuer lends you the money and sends your bill. The card network is the system that carries the payment message between banks. Its logo is often on the corner of the card.

The store has its own bank or payment company, which receives the money for the sale. Each of these may take a small part of the processing cost. That is why one swipe can feel simple to you while a lot happens behind it.

Knowing the players can help when something goes wrong. A billing question about your account usually goes to the issuer. The phone number on the back of the card is often the first place to call.

Turn over one card and note the phone number on the back in your money notebook.

How rewards fit into the picture

Rewards such as points or cash back can feel like free money. They are paid for somewhere along the line. In general, rewards are often funded by the store costs and the interest and fees the issuer collects.

Here is a made-up example. A card pays a made-up 1 percent back. A $200 month of purchases earns $2. If that same month a $200 balance is carried at a made-up 2 percent monthly interest, the interest is $4. In this case, the interest is twice the reward.

Many people enjoy rewards and pay their balance in full each month, so no interest is charged. Others find rewards tempt them to spend more. Both are common, and only you can tell how a reward card fits your own habits. Another place to look is common myths about credit scores.

Add up last month’s rewards and any interest on the same card, and place the two numbers side by side.

Where to find the numbers on your own card

Most of what this guide covers lives in two places. The first is your monthly statement. It shows the balance, the minimum payment, the due date, interest charged, and fees charged that month.

The second is the card agreement. Many agreements include a summary table near the front that lists rates and fees in one spot. It can be easier to read than the pages that follow.

If any line is unclear, the issuer’s customer service team can explain it. You might ask them to point to the exact place in the agreement. Having it in writing can make it easier to look back later. For related reading, see this page about paying off card debt.

Find the summary table in one card agreement and save a copy where you keep important papers.

Questions to ask about any card

A few plain questions can make any card easier to understand. Is there a yearly fee? What is the APR on purchases, cash advances, and balance transfers? Is there a grace period, and how does it work?

A few more can help too. What happens if a payment is late? Does an intro rate end, and what comes after it? Are there fees for using the card in another currency?

There is no wrong time to ask, even years after opening a card. If card balances are causing worry, feeling confused or stressed is normal. A nonprofit credit counselor or a trusted person can help you look at options calmly.

Copy these questions into your notes, and answer the first three for one card you already have.

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