This Is How Credit Card Companies Make Their Money

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Credit cards are a significant piece of many people's personal finances. According to research from The Motley Fool Ascent, 80% of us have at least one.

Credit cards make it easy to earn cash back and other rewards on your purchases, and the best ones offer solid perks like purchase protections, travel insurance, and more. But credit card companies don't do this out of the kindness of their hearts -- they exist to make money, like any other business.

Let's take a closer look at how credit card companies earn money -- and see how you can keep credit cards from costing you money.

Swipe fees

Have you ever noticed that some retailers tack on a surcharge when you make a purchase with a credit card -- or even require you to spend a certain amount (I see $10 often) to use a card? This is due to swipe fees, which is how credit cards make money off merchants.

Swipe fee percentages range from 1.15% to 3.15% of each credit card transaction (varying by card network and whether the transaction is in person or online). Visa and Mastercard have the lowest in-person swipe fees, which explains why these cards are more commonly accepted than Discover or American Express.

Annual and other card fees

Credit card companies make a boatload of money off consumers, in a few ways. Some credit cards charge an annual fee, a direct way you might pay your credit card company.

Credit cards come with other fees too -- if you pay your bill late, you'll be assessed a late fee. Take out a cash advance? There's a fee for that too. Want to add an authorized user to your account and get them a card? That could also be a fee.

You might also pay a fee (often around 3%) to use your card to make purchases in a currency other than U.S. dollars (these are known as foreign transaction fees). If you read the fine print for your credit card, you'll learn all kinds of ways the issuer can make money off you via fees.

Interest charges

Here it is, folks -- the biggest source of income for credit card companies. If you carry a balance on your credit card from month to month, and you're not using a 0% intro APR offer, you're likely paying high interest rates on that balance. In May 2024, the average interest rate on credit card accounts assessed interest was 22.76%, according to the Federal Reserve Bank of St. Louis.

To put that into perspective, let's say you've got a $5,000 balance on a card charging that interest rate. If you pay $150 a month toward your balance, it will take you 53 months (that's more than four years) to pay it off, and you'll pay $2,986 in interest. Ouch.

Make your credit cards work for you

So now that you know how credit card companies make money, it's time to see how you can pay them as little as possible for the privilege of using your credit cards.

Be judicious with annual fee cards

Annual fees are not inherently bad. Some of the best credit cards have them -- but in an ideal world, you're getting enough benefit from your card to justify that fee. For example, my favorite grocery rewards credit card charges an annual fee, but last year, I earned enough cash back with that card to cover the annual fee four times. This is another reason it's great to match your cards to your actual spending.

Skip the cash advances

Cash advances are a terrible way to use your credit cards, for a few reasons. You're charged a fee to get one, and the interest you'll be charged on the amount you borrow starts being charged immediately -- there's no grace period, like you have when you use your card for purchases. Your cash advance credit limit is much lower than your card's credit limit. And there are better ways to borrow money, such as a personal loan or a small dollar loan from your bank.

Don't carry a balance

Finally, it's best to avoid carrying a balance on your credit cards. I know this is easier said than done, in this economy and with the cost of living on the rise. I spent many years struggling with credit card debt I took on to cover everyday and emergency expenses, and it took changing careers and increasing my income to finally get out from under it and build an emergency fund.

If you're trying to pay off debt, my heart goes out to you. I recommend my approach -- taking on a side hustle (or even just picking up extra paid work at your main job, if you're not paid a set salary) and snowballing your debt. Paying off your balances from smallest to largest gives you the psychological satisfaction to keep going -- and as your snowball grows and your balances dwindle, it's going to feel amazing. I promise.

Credit card companies make money from all of us, in various ways. Follow the tips above to ensure they make as little as possible from you, so you can benefit from your card without feeling a big financial pinch.

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.American Express is an advertising partner of The Ascent, a Motley Fool company. Discover Financial Services is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool has positions in and recommends Mastercard and Visa. The Motley Fool recommends Discover Financial Services and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy .