How do credit card companies make a profit?

How do credit card companies make a profitFees are the main way credit card companies make a profit, and they may charge a lot of them. Although new laws were put in place to protect consumers, certain credit card companies still found ways around those laws so they can continue to rake in large profits.

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Reading the fine print – several times – can help you find a credit card that engages in fair business practices. It can also make you well aware of the fees you’re being charged that are going into the company’s pocket of profits.

What fees may I be able to avoid?

Even if fees are part of a credit card’s deal, you may be able to avoid some of them if you keep an eye on your balance due. Late payment fees may be avoided by paying your balance on time, while fees for going over your credit limit may be avoided by keeping your spending within your credit limits.

You may be able to avoid paying finance charges on your credit card if you pay off your balance within a certain amount of time. Some may offer a credit card grace period where you accrue no interest on purchases as long as they are paid off before the grace period expires.

What fees are usually unavoidable?

A number of other fees may be unavoidable if you opt to use the services of a particular credit card that charges those fees.

  • Cash advance fees: These are one example noted the Federal Reserve’s credit page, as some may charge you for taking a cash advance on your credit card. The only way to avoid such a fee in some cases may be not to use the credit card for cash advances.
  • Credit limit fees: Credit cards may also charge for increasing your credit limit, which may be avoided by not requesting a higher limit.
  • Application fees: Applying for a credit card can come with an application fee, the Federal Reserve warns, and many credit cards may require other fees just for having the card. These fees may be billed as participation fees, membership fees or simply annual fees and may be charged on an annual or monthly basis.
  • Annual fees: Fees for simply having the card may apply to various types of credit cards, including reward credit cards, hotel credit cards, gas credit cards, dining credit cards and student credit cards. Reading the fine print carefully before you go with any card at least lets you know if such profit-making fees exist.
  • Activation fees: Setting up a new credit card often comes with an activation fee or set-up fee, which can apply in the cases of instant approval credit cards as well as credit cards that require an application process.
  • Balance transfer fees: Profits for credit card companies can also come from balance transfer fees, which are typically an unavoidable aspect of balance transfer credit cards.

While balance transfer credit cards allow you to transfer balances due to escape high interest fees from other credit cards, they usually charge a percentage of the overall balance as part of the deal. If the balance you are transferring is high, this can result in a sizable fee – and sizable profits – for the for the balance transfer credit card company.

What options may also come with profit-making fees?

Credit card insurance coverage and debt coverage can also translate to profits for the credit card companies – as long as they do not have to provide the coverage. As with any insurance transaction, the company can make a profit provided they have more people paying into the kitty than claims they have to pay out.

Credit card insurance that may incur a fee include insurance that would cover your payments or the money you owe in the case of unemployment, disability, or death. Certain types of insurance may suspend payment on your debt until your recover or get a new job, while others may cancel the debt altogether.

What are some sneakier tactics credit card companies have used?

The CARD act protects consumers from overly ambitious credit card practices, although certain companies still found ways around the laws, according to the

One example involved a rule that limits the amount of fees a credit card can charge you during your first year with the card. First Premier Bank took care of that potential loss of profit by charging a hefty processing fee of $95 before the card is even used.

As sneaky as some of the profit-making tactics may seem, they still must be outlined in the fine print of your credit card agreement. Making a profit is the only way most companies can stay in business, but you may still be able limit the amount of money you are directly paying into that profit.

Use our credit card finder now to compare and select a credit card that is upfront, honest and devoid of sneaky fees.

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