How do Credit Card Companies Make Money on Cheap Credit Cards?

8 July, 2011

As a consumer, what’s not to love about cheap credit cards? The combination of a low interest rate and low (or even no) annual fee is tough to beat. Even better, some cards like the Citibank Clear Platinum credit card offer 0% interest for a while. So how can these credit card companies be making money off of these low cost credit cards? Why do they continue to offer these types of deals?

Let’s take a look at some of the ways credit card companies earn money on cheap credit cards. First, it’s just interesting to know. Second, some of the ways they earn money on these cards involves you paying more than you might assume when you first come across the deal.

3 Ways Credit Card Companies Make Money on Low Cost Credit Cards

Here are three ways credit card companies can still make money on what look like cheap credit card deals to consumers.

1. Balance Transfer Offers

One of the groups that find cheap credit cards appealing is the group of consumers searching for balance transfer offers. They’re already paying too much in interest, so the low interest rates (introductory rates or permanent ones) pull them in. The thing is, those balance transfer rates might be low, but they aren’t usually 0%. And 0% interest offers don’t tend to last very long.

Credit card companies know that most consumers taking advantage of balance transfers aren’t going to pay off the balances very quickly. If you could afford to pay it all off in a month or two, you would likely just pay off the balance on the current card without the hassle of a transfer. So they’re almost guaranteed to collect some interest from you (and without waiting for you to rack up that amount of debt through new purchases like a new cardholder). On the other hand, there’s no such guarantee with regular cardholders because they could easily pay off balances in full every month to keep getting interest free days.

2. Other Fees

While we mostly think about interest rates and annual fees when we think about credit card costs, there are other credit card fees to consider too. For example we have cash advance fees, late fees, and foreign transaction fees. While you might not pay all of those fees often, enough consumers do that credit card companies can still make money with them even when other credit card terms make you think of it as a very low cost card.

3. Merchant Payments

Here is the most important revenue stream credit card companies have, because it’s what really allows them to offer 0% or low interest offers and cards with no annual fees. Basically, they aren’t relying on you or other cardholders as much for income because they get fees from merchants for each transaction. That means it’s in the credit card companies’ interest to have as many cardholders as possible using their credit cards. And that is why it’s also in their interest to keep cheap credit cards on the market; it’s a marketing strategy. What they lose in income from you they potentially make up for in income from merchants that accept your credit card payments.

As you can see, there’s no need to worry. Low cost credit card offers aren’t going anywhere. But now hopefully you have a better understanding of why credit card companies are able to offer these seemingly unbeatable deals in the first place. Hint: it’s not from the goodness of their hearts.

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