As discussed in the previous section, credit cards are a great way to access money. By charging purchases against your card, you create an easy way to spend money. But how much does the bank make off of this?
Mostly, banks make their profits through two things: fees for using the card and interest on all of the loans that customers permit them to charge to it.
The most common type of fee is something called the annual service fee. This is typically charged each year after the initial purchase date of the card, and almost always comes with a large per-transaction usage fee as well.
Another less obvious but very profitable fee is one that few people know about! That is the 0% balance transfer penalty. Many major banks have a system where they will reward customers who keep their balances low by offering lower monthly payments or even a free loan if you put some down payment towards buying a home!
So what happens when someone spends all of their available cash because they just bought a car? You get penalized for having a high savings account! It’s hard to maintain those savings when you need to buy groceries every day.
Online shopping has become the new normal way to shop. With the availability of virtually infinite merchandise from anywhere in the world, you have more options than ever before!
That can be a good thing or a bad thing, depending on how much time you have to spend searching for that perfect item and whether you like the look of some brands more than others.
Luckily, we’ve gathered some helpful tricks to help you save money by making the right choices while spending time looking through your cart. These strategies will prevent you from buying something just because it is offered as “buy now” or “enter code here�” at checkout, but instead make sure they are cost-effective and worth the price.
You may also want to read our article about the best laptop bags to keep your gear safe and organized.
Reward program memberships are another way that credit card companies make money with your business. Companies create reward programs for their customers to enjoy discounts at places they eat, shop or spend time near where they work.
Many employers offer rewards cards to their employees so they can save money by spending cash on food, travel and shopping. Employees can even use these cards to earn extra points towards rewards!
Clothing stores and big box retailers offer reward certificates and gift cards as “rewards” for people who spend certain amounts on purchases. By offering such rewards, they appeal to someone conscious about spending money.
By getting some of those benefits for yourself, the company gets paid back along with your employee. Obviously, the more they pay for the item, the better return they get on their investment.
When you spend money, your spending pattern changes. If you’re buying a new phone every two months, that is going to add up quickly.
With each purchase, credit cards play an important part in how much you spend. With every transaction, a card company makes a small profit by offering a reward or incentive for doing business with them.
These rewards can be cash back, free merchandise, or even VIP services such as front-row seating at a show.
By keeping these rewards organized, Visa was able to create what they refer to as The Culture of Rewards.
This culture encourages active spending because people are constantly looking for ways to earn their keepers.
At the same time, there’s also an endless supply of incentives to reduce debt. Debt reduction benefits include lower interest rates, 0% balance transfers, and even a clear picture of the future market value if you don’t pay off all of it immediately.
Since its inception, VISA has made money off of online shopping. By offering discounts and/or credit to customers who purchase certain products or services through their network, they make a profit from your spending habits.
The more you spend, the higher their profits are!
By them offering discounts and/or credit to online purchases, they create an incentive for people to shop via the internet instead of in-store or phone-based transactions.
This is how they make their money — by creating a market where individuals and businesses choose to do business with them rather than other companies that don’t offer such perks.
Overall, VISA makes a lot of money off of this practice alone. According to Business Insider, “Visa earned $2 billion in net revenue [in 2017] just by paying lower transaction fees as competitors struggled to survive.
While most of us now live our lives mostly online, spending almost all of our time-consuming content through gadgets connected to the internet, this is not always the case. With the ever-increasing number of people that have limited access to the internet or who just prefer buying in person, offline purchases are still very popular.
Many retailers make money off these sales by passing the cost onto consumers either via higher prices or lower discounts. The expensive price tag for products is due to the retailer being paid to promote the product by the manufacturer. This is how most big brand name goods get wide exposure and their manufacturers earn profits from them.
The other way is what we refer to as “channel stuffing” which comes down to putting out enough advertisements to draw more customers into stores so they will buy something else later. We've discussed this tactic before in TV commercials.
Retailers also gain revenue from the high merchant fees used to process credit cards.
Credit cards have become such a common way to spend money that many people no longer perceive them as tools for good governance. They feel more like payment methods designed to make large corporations rich by charging high fees for use of their products.
There are several reasons why these expensive plastic cards were needed in the first place. One reason is that before there was credit, buying things was much harder. You had to save up your cash beforehand, so you had enough money to buy what you wanted!
With credit comes interested, though. Companies loan you money so they can get back the fees they charge you to use their product (the credit card) and then they earn a profit off of the interest payments they charge you per month.
This isn’t necessarily a bad thing, but it does mean that big company have the incentive to keep us spending money. And while some argue that this influence is limited to just a few powerful businesses, others say it’s very prevalent throughout our economy.
While credit cards give you access to money, they can also earn enough profit for banks and corporations to ask how that use of their product is profitable to them. For example, banks charge interest on cash deposits to make money off of those funds!
Banks will typically pay higher interest on the high-balance, highly qualified customers. They call this customer category “prime” due to their high-quality deposit.
Prime members are just like rich people who have lots of money — they enjoy great benefits from banking. More expensive loans mean more profits for the bank, thus giving them the incentive to offer you these products.
However, not every person with a large deposit is a good candidate for credit card rewards or investing. Credit cards could be expensive if not done responsibly and having a lot of savings means you cannot afford to spend too much money.
That being said, there are some very affordable ways to get reward credit cards through check cashing services or loan establishments.
As mentioned earlier, Visa and other credit card companies make money off of their terms and conditions. These are things like how they will charge you for international transaction fees or if you will have to pay extra because you live outside of the country where you can spend your gift certificate.
These fees can add up very quickly, so it is best to be aware of what these policies are before spending any cash!
Most major cards have an easy way to get rid of those charges. If you find that happening, go ahead and do it! The least expensive option is usually to suspend your account which means no purchases can be made through the card until you re-activate it.
There is also always a fee involved in suspending your card, but most people seem to prefer this route over cancelling the card completely.
