Understanding How Credit Card Companies Turn a Profit

There are many different things that are involved in credit card education. To understand your credit cards and to use them properly, you need to know how they work and what you can do to make them work in your favor. You also need to understand the point of view of the credit card company. It’s a case of needing to know the enemy. By understanding how it is that credit card companies turn a profit, you can better understand what you need to do to keep your money in your own pocket instead of using it to improve the credit card company’s bottom line.

Here is a look at some of the ways that credit card companies profit off of you:

• They charge interest. The most obvious way that credit card companies make their money is that they lend you a set amount and then charge interest so that they get more back in the end than what they lend out in the beginning. For example, you borrow $1000 from them to make a purchase but you are charged interest; by the time you pay it back, you’ve given them $1200 and they’ve made a $200 profit just by giving you the money. The way to make sure that the money stays in your pocket instead of going to theirs is to always look for a low interest rate on your credit cards and to pay back all debts as soon as possible after acquiring them so that you pay less in interest.

• They charge transaction fees. There are a variety of different transactions that you may make on your credit card which allows the credit card company to gain additional money. For example, you are likely to be charged a fee for completing a balance transfer transaction or getting a cash advance. This fee is usually something like 3% of the total transaction. So, they lend you the $1000 as a cash advance and automatically get 3% profit on that because of the fee; plus they still get the interest as described above. Choosing not to make fee-based transactions and being aware of the fee will help you keep your money in your own pocket.

• Penalty charges. There are also a variety of fees that can be applied as penalties when you don’t follow the rules of the card. For example, when you make late payments or you go over the limit on your card, you may be charged a fee or penalized with a higher interest rate. Make sure to always follow the rules of the card in order to reduce the amount of profits that you’re giving your credit card company and to increase what you keep in your own savings account.

Basically, you want to be aware of how credit card companies make their money off of working with you. You want to limit the amount of profits that they make in order to make sure that you’re keeping as much of your money as possible. The more that you understand about your money, the better of a position you will be in to use it well.