Skip to main content
Acima Leasing Logo

How Do Credit Card Companies Make Money?

Aug 12, 2022

A scene of a young couple shopping in front of a store front of retailers.

If you're in the process of applying for a credit card, and you find yourself asking how credit card companies make money, you're not alone! After all, if you don't carry a balance, they don't make any money off of you. And if you do carry a balance, they only make a small amount of money in interest. So how do they stay in business?

It's common for people to wonder how credit issuers make a profit, and it’s a question that has a few different answers. Here's a look at some of the ways credit card companies generate revenue. Afterward, we’ll give you five ways that you can personally reduce the amount of money you pay to credit card companies.

How Do Credit Card Companies Work?

Before we explain how credit card companies make money, it's important to understand how they work. Credit card companies are in the business of lending money to both consumers and businesses, and they do so by issuing credit cards. Consumers use credit cards to make purchases, and businesses use them to cover expenses. This arrangement allows businesses to make purchases without having to pay for them upfront, and it allows consumers to finance their purchases over time.[1] [EC2]

Where Does the Money Come From? Four Profit Sources:

Now then, let’s get to the question at hand. Here are the four main ways that credit card companies make money.

1. Interest Charges

Credit card companies make money by charging borrowers an annual percentage rate, or APR, on the money they borrow, a profit source known as “interest charges.” This rate is typically a fixed amount, and it's calculated by dividing the cost of borrowing money by the amount of time it takes to pay it back. So, if you borrow $1,000 and your lender charges you an APR of 10%, you'll owe them $100 in interest charges after one year.

2. Annual Fees

Credit card companies also make money by charging annual fees on their cards. These fees are typically a set amount, and they're charged to the cardholder each year they have the card. So, if you have a credit card that charges an annual fee of $50, you'll be charged that amount every year during the life of the card. Typically, cards with annual fees will have additional benefits, such as rewards programs or lower interest rates.

3. Penalty Fees

Credit card companies also make money from penalty fees. These are fees charged to cardholders for things like making late payments, going over a credit limit or having a payment returned. Penalty fees can be either a set amount or a percentage of the amount owed, and they're typically charged in addition to any interest that's owed on the account.

4. Processing Fees

Credit card companies also make money from processing fees. These are fees charged to merchants for each credit card transaction that they process. Processing fees are typically a percentage of the total transaction, and they're paid to the credit card company by the merchant. So if you make a purchase of $100 with your credit card, the merchant may have to pay the credit card company a processing fee of $2.50. This fee is in addition to any other fees the merchant may charge for using a credit card.

Five Ways to Reduce What You Pay to Credit Card Companies

1. Pay your balance in full every month

The best way to reduce what you pay to credit card companies is to pay off your balance every month. This way, you'll avoid paying interest charges, and you'll also avoid paying any annual or penalty fees. If you can't pay your balance in full, make sure you at least pay the minimum due each month.

2. Use a credit card with a low interest rate

If you carry a balance on your credit card, it's important to use a card with a low interest rate. This way, you'll reduce the amount of interest charges you have to pay. You can find cards with low interest rates by shopping around and comparing offers from different companies.

3. Avoid using your credit card for cash advances

Cash advances are one of the most expensive ways to use your credit card. They typically come with high interest rates, and they may also have additional fees. If you need cash, it's best to get it from a different source.

4. Don't go over your credit limit

If you go over your credit limit, you'll be charged a fee. So, it's important to keep track of your spending and make sure you don't go over your limit. You can find out your credit limit by contacting your credit card company.

5. Don't make late payments

If you make a late payment, you'll be charged a fee. That’s why it's important to pay your bill on time each month. If you’re worried about missing a payment, you can set up automatic payments to make sure your bill is paid on time.

How Can Acima Leasing Help?

If you're looking for a way to get the products you need without using credit*, Acima Leasing can help. We offer flexible lease-to-own solutions* that make it easy for you to take home the things you need. Unlike a credit transaction, Acima will purchase qualifying merchandise up to your approval amount and lease it to you. Our manageable lease renewal payment options* help you stay in control while you’re choosing where to go shopping. If you make the number of payments defined your lease or exercise an option to purchase it early at a discount, it’s yours! If you no longer need your items, you can simply return it in good condition at any time without further obligation. Acima Leasing offers thousands of shopping choices from the stores you know and love. We also make it easy to navigate with a store navigator categorized by product type. Get started today, and see how Acima Leasing can help you bring home the things you need today, without using a credit*. If you still have questions, learn more here about Acima Leasing or on our FAQ page.

Common Questions About Credit Cards:

Can a credit card company sue me?

Yes, a credit card company can sue you if you don't pay your bill. If the credit card company wins the lawsuit, they'll likely get a judgment against you. This means they can try to collect the money you owe by garnishing your wages or seizing your assets. However, credit card companies will typically only sue you if you owe a large amount of money; they will generally turn your debt over to a collections agency if you owe a smaller sum.

Can a credit card company garnish my wages?

Yes, a credit card company can garnish your wages if they have a judgment against you. This means they can take a portion of your paycheck to pay off the debt you owe.

How do I negotiate with credit card companies?

If you're struggling to pay your credit card bill, you may be able to negotiate with the credit card company. You can try to negotiate a lower interest rate, a lower monthly payment, or a longer repayment period. You can also ask the credit card company to waive late fees or over-the-limit fees. If you're not sure how to negotiate with a credit card company, you can hire a debt settlement company to do it for you.

Do credit card companies verify income?

Yes, credit card companies typically verify your income when you apply for a credit card. They do this to make sure you can afford to make the minimum monthly payments. You can provide your income information by submitting pay stubs or tax returns.