Article/Chart: How Do Credit Card Companies Make Money?

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Oct 19, 2016
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Credit Cards, Question of the Day, Research, Debit Cards, Purchase Decisions, Current Events, Chart of the Week, Article

From the Economist:

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Economist article provides good description of interchange fees paid by merchants to card companies (and ultimately paid by consumers):

American consumers favour debit and credit cards over cash by more than two to one. But this convenience comes at a cost. The seller is charged a fee for every card purchase: in America, typically 0.5% to 3% of its value. These fees are set by payment-card networks, such as Visa and MasterCard and collected by card issuers, such as Wells Fargo and JPMorgan Chase. Some portion of these fees is borne by consumers, including those who pay by cash, in the form of higher prices.  

I found the chart on the bottom of interest (no pun intended) since it lays out the revenue models for credit card companies (note that it excludes interest income paid by consumers who carry balances on their credit cards).

Questions:

  • After reading the article, how would you describe interchange fees in your own words.
  • What are the three biggest fee sources for credit card companies excluding interchange fees?
  • Which of the fees above are avoidable?
  • What steps can a cardholder take to avoid each of these fees?

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About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.