What Risk Does the Credit Card Company Have?


Credit Card Company

Credit card companies make a lot of money by simply offering credit cards to individuals and managing them. In fact, statistics indicate that credit card companies posted $176 billion in income in 2020, down from $178 billion in 2018. With such statistics, one may assume that credit card companies run without risks. But that isn’t true. If so, what risks do these companies have?

Credit card companies offer loans in the form of credit cards. Like typical lenders, these companies are at risk of the credit card owners not repaying what they owe even after being slapped with penalties.

While understanding the risk associated with a credit card may not benefit your financial situation in any way, it makes sense that you have such insight. Credit card companies make a lot of money. However, many of us aren’t aware of the risks these companies face. I have covered that and other related topics in this article.

When Is the Best Time to Pay Credit Card to Avoid Interest

What Risk Does the Credit Card Company Have?

Before we look at the risks associated with credit card companies, why don’t we first understand what credit card companies are first?

What Are Credit Card Companies?

Credit card companies are financial institutions that provide cards and credit limits to consumers. These companies manage several features of credit cards, from the application and approval process to distributing cards, deciding terms and perks (like annual fees and rewards), collecting cardholder’s payments, etc.

Credit card companies also determine how much credit to offer their users and have the final say on whether a transaction you initiate is approved or turned down.

Below are some common credit card companies:

  • American Express
  • Bank of America
  • Capital One
  • Chase
  • Citi
  • Discover
  • U.S. Bank
  • Wells Fargo

So credit card companies provide credit cards to their users. And that brings us to the question, what is a credit card?

What Is a Credit Card?

A credit card is a rectangular card that can be used to initiate a purchase, pay bills, or withdraw cash, depending on the card. The simplest way to think of a credit card is a card that offers its users a type of short-term loan.

When you open a credit card account, your credit card issuer or company gives you a set credit limit. This is essentially any amount of money the credit card company allows you to use to initiate a purchase or settle bills.

Your available credit diminishes as you charge things to the card. You then repay what you spent from your credit limit to the credit card company.

How Do Credit Cards Work?

A credit card is simply a small loan from an issuing bank. While some may see a credit card as “free money,” in reality, your credit limit is a loan subject to an annual percentage rate charged to you as the cardholder if you fail to settle your balance at the end of a billing cycle.

When the bank approves your credit card application, it will attach a credit limit to your account, which will allow you to spend with the card. Your credit card limit is designated according to your income, debts, credit history, and other criteria.

When you initiate a purchase with your credit card, the transaction is processed by one of the four payment networks: Visa, MasterCard, American Express, or Discover. Their role is to ensure the merchant gets money for the transaction and that your card issuer bills you for whatever you buy.

Immediately you purchase goods or services with a credit card; the purchase amount is removed from your available balance. Conversely, when you make a payment on your credit card account, you will have more available credit to use for other purchases.

What Does Closing Date Mean on a Credit Card?

How Does Credit Card Payment Work?

After you make purchases with your card, you will receive a credit card bill each month. It is crucial to know that you won’t be required to pay your full balance each month; it’s beneficial that you do so. Instead, you only have to make a minimum payment, which often ranges from 1% to 3% of your unpaid balance (including any interest and fees from the former month).

When possible, it makes sense to pay your balance completely. While it may seem comfortable to only make a minimum payment, this is when it is crucial to remember that money you have spent isn’t yours and must be returned in full.

Any unpaid balance on your credit card is subject to added interest that accumulates monthly. Only paying your minimum balance is good if you are in a financial storm; however, doing this continuously over a long time could get you into credit card debt that only seems to increase.

After making a payment, your bank or credit card issuer reports your payments to the credit agencies. Make sure your payment is early by setting up automatic monthly payments for the minimum amount or another amount of your choice. Most banks also offer email or mobile notifications to inform you when your due date is approaching.

How Does Credit Card Interest Work?

You can steer clear from paying interest by settling the whole of your credit card balance every month. If you pay in full every month, your issuer will provide a grace period, usually 21 days or more from the end of your billing cycle to your payment due date, during with you can pay for your transactions without interest.

However, if you decide not to pay the whole balance, any leftover balance will be transferred into the next monthly billing cycle and start to accumulate interest. Since you generally lose your grace period when you carry a balance, you’ll start accumulating interest on new buys, as well.

The amount of interest you’ll pay is according to the annual percentage rate (APR) your credit card company allocates to your account. The bank establishes the APR for your credit card account by scrutinizing your income credit history, including other factors.

How Do Credit Card Companies Make Money?

Credit card companies make a huge percentage of their money from three major things: interest, fees charged to cardholders, and transaction fees paid by businesses that take credit cards. Use credit cards judiciously, and you can reduce the amount of money that credit card companies make off you.

How Credit Card Companies Work?

The general term “credit card companies” includes two categories of enterprise: issuers and networks.

Issuers are banks and credit unions that issue credit cards, like Chase, Citi, Synchrony, or PenFed Credit Union. When you use a credit card, you borrow money from the issuer. Retail credit cards that carry the name of a store, Gas Company, or other merchant are usually issued by a bank under contract with the retailer. Hence, these are often regarded as “co-branded” credit cards.

Networks are companies that process credit card transactions. The major networks in the United States are Visa, Mastercard, American Express, and Discover. American Express and Discover are both networks and issuers.

When you use a credit card, money is transported electronically via many hands, from the issuers, through the network, to the merchant’s bank. The network also ensures that the transaction is linked to the right cardholder, you, so that your issuer can charge you.

What Happens if I Use My Credit Card on the Closing Date?

Credit Card Payment

Where Does the Money Come From?

You are an essential ingredient in a credit card company’s moneymaking recipe, like the merchants where you use your cards.

Interest: A huge percentage of revenue for mass-market credit card issuers comes from interest payment, based on the Consumer Financial Protection Bureau. But, interest can be avoided. Issuers normally charge interest only when you move a balance from month to month. Settle your balance completely, and you won’t have to pay interest.

Fees: Subprime issuers, those that handle people with bad credit, normally make more money from fees than interest. Mass-market issuers charge a lot of fees, as well, although many of them can be avoided. Major fees include:

Annual fees. Annual fees are normal on credit cards with big reward rates, including cards for individuals with less-than-good credit scores.

Cash advance fee. Issuers charge these fees when customers use their card to receive money at an automated teller machine. The fees range from 2% to 5% of the amount withdrawn, often with a minimum dollar amount, like $5.

Balance transfer fees. When you transfer debt from one credit card to another to get a lower interest rate, you’ll usually be charged a fee of 3% to the 5% of the amount transferred. Some cards don’t charge these fees or waive them for some period.

Late fees. If you fail to pay the minimum amount by the due date, you’ll be slapped with a penalty in the form of late fees. Some cards waive the first late fee or don’t charge these fees at all. (Your credit scores, however, can still plummet if you make a late payment.)

Interchange. Each time you use a credit card, the merchant pays a processing fee equal to a percentage of the transaction. The percentage of that fee sent to the issuer through the payment network is known as “interchange,” and is usually about 1% of the transaction. These fees are set by payment networks and vary according to the volume and value of transactions.

Savvy Customers Cut Their Costs:

Without cardholders like you, credit card companies may end up broke, but you can reduce the amount they make from you. Avoid additional costs by:

  • Paying your balance completely every month to escape interest charges
  • Setting up electronic alerts that inform you when payments are due so you avoid late fees
  • Setting aside money in an emergency fund to avoid costly options like cash advances
  • Selecting a credit card without balance transfer fees
  • Paying a yearly fee only if the rewards you’ll receive from the card will be greater than the cost. Remember that rewards and sign-up bonuses can put money in your pocket, but card fees and interest can delete it.

Do Credit Card Companies Have Any Risks?

While credit card companies make billions of dollars each year, mainly from accumulated interest, it may surprise you to note that they are sometimes at risk. If, for instance, an individual fails to pay his credit card balance, a credit card company will slap him with sanctions, right?

However, what happens if the sanctions do little to compel such an individual to pay what he owes? The credit card company sells the debt at a discount to debt collectors. That way, they lose money.

So, credit card companies are often at risk, especially when a huge amount of credit card users forces them to sell their debt to collection agencies. Or if a certain credit card user compels them to take legal action, which may result in them spending on legal fees, a loss on their end.

How Much Do Credit Card Companies Make per User?

Based on data from date from 2017, each active account makes $180 on average for credit card companies each year. Again, credit card companies make money mainly from the interest accumulated and the interchange fees per account.

CompanyActive Cardholder AccountsInterest Per AccountInterchange Per AccountTotal
American Express62,700,000$36.93$60.43$97.36
Barclays16,300,000$180.50$18.50$199.00
Capital One62,100,000$172.31$34.09$206.40
Chase Bank82,800,000$118.58$21.13$139.71
Comenity9,589,510$368.45$15.25$383.70
Discover38,700,000$191.23$17.40$208.63
Synchrony36,700,000$243.38$16.43$259.81
Source

Credit Card Income for Five Common Banks in the United States:

The table below indicates the year-to-date credit card income for five banks. This information is self-reported by banks from 2019 yearly report data.

CompanyCredit Card Interest IncomeInterchange IncomeTotal
American Express$8,620,000,000$4,042,000,000$12,662,000,000
Barclays$3,079,000,000$244,000,000$3,323,000,000
Capital One$18,349,000,000$3,179,000,000$21,528,000,000
Chase Bank$51,660,000,000$20,370,000,000$72,030,000,000
Discover$9,700,000,000$1,066,000,000$10,766,000,000
Source

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