How do Credit Cards Make Money? I Found Out the Hard Way

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How do credit cards make money - it's through a number of factors really. Here are the main ways credit card companies make money from your normal activity.

I pulled my new American Express Sky Blue credit card out of my wallet the other day and swiped it through the card reader at Target. I had time to admire my card since my kids were at home with John. (Typically, standing in line at the store is a chaotic experience that leaves me wishing that I’d have enough hands to keep my kids out of all the candy and trinkets in the checkout line and not wondering how credit card companies make money) The card was thin and clear and had a picture of a jet flying across it.

As the checker rang up my items, I imagined myself in that jet, on a trip to my homeland – sunny San Diego. I knew I was earning travel rewards with this purchase that would get us closer to another free trip – here are the top cards to help you earn travel rewards as well.

I also knew that unlike my spending habits ten years ago, I’d be paying this purchase off when the monthly bill arrives.

This transformation in my buying behavior all came about after I asked myself one day, ‘How do credit cards make money, anyways?’ If you’re wondering how credit cards make money, then today’s post is for you.

Who’s Lending Me Money?


To answer this question, I really needed to start with asking myself two questions – namely, ‘Who am I borrowing from?’ and ‘How do credit cards work?

Early in our marriage, John and I used credit cards to fund a lifestyle that was beyond our means. He’s talked about it here before, but we made short-sighted, impulsive purchase decisions, and we used our credit cards to fund those decisions. Trips to Vegas, dinners out, new tennis shoes, and movie tickets are just some of the things I remember buying.

Now, there’s nothing wrong with buying those things, or even using a credit card to do it, but our problem was that we didn’t have the money in our budget to afford them. Unfortunately, we didn’t choose to allow reality to temper our purchase decisions and so, on the credit cards they went.

How Do Credit Cards Make Money?


After discovering that the same credit card companies who had been so eager to fund my foolish lifestyle were now not so willing to help me turn over a new leaf and live a frugal lifestyle, I began to look at the cold, hard reality of how credit cards make money. Credit card companies have a number of ways of making money, which include:

  • Fees (annual fees, over-the-limit fees, late fees, cash-advance fees)
  • Interest on the revolving debt we carry with them
  • A cut of the purchase price from the merchants we make our purchases from (ranges from 1 – 4 percent per purchase)
  • Commission from selling cardholders’ names to others so more people can hawk their cards and wares at us

Credit card companies make a lot of money. Total revenue for the credit card industry was nearly $155 billion in 2011. That’s even with the weak economy driving credit card spending down among consumers. In 2010, credit card companies made nearly $164 billion off revenue from credit card accounts. Credit card companies made over $20 million from fees in 2009.

Since the Credit CARD act went into effect a few years ago, that figure has fallen by a stunning $500,000. Now, what you may know that I didn’t at that time, is that credit card debt is unsecured debt.

That means there is little that credit card companies can legally do to get their money back if a cardholder refuses to pay off charges they’ve made with that company’s money. You don’t get that feeling though, if you stop making your payments.

How do Creditors Get You to Pay?


Our answering machine filled up with messages from scary-sounding people threatening to come to our home, put us in jail and all other manner of threatening actions if we didn’t pay up. It was at that moment that I realized who I had been borrowing money from all along.

My credit card company wasn’t a kind, wealthy benefactor looking to fund the lifestyles of strangers. When my purchases turned from foolish Vegas trips to weekly grocery bills, my lender didn’t care.

Now I know that credit card companies care about one thing – the health of their own bottom line. They will make money off me and all their cardholders at any cost. I have made a silent vow to myself that if we ever get into such financial straits again that we don’t know how we will pay for groceries, I won’t charge my groceries; I’ll go stand in line at a soup kitchen, with all three of my kids, first.

How do credit cards make money - it's through a number of factors really. Here are the main ways credit card companies make money from your normal activity.

How Can You Turn Their Strategy On Its Head?


Credit card companies rely on our foolishness to make money. They’re counting on their cardholders to let self-control and wise spending go by the wayside. They’re hoping we won’t be able to resist advertising ploys (and I work in the advertising industry, writing the tag lines designed to get people to make purchases, so I know how effective they can be).

The best credit cards offer rewards designed to entice us to buy, spend and shop beyond our means. But we can turn credit card companies’ strategy on its head with a little self-control, a budget and a commitment to purposeful spending.

Today, we use rewards to stretch our budget, not bust it. We don’t make purchases that we haven’t already budgeted money for, and we use the rewards creditors are willing to give us to our advantage.

I already mentioned travel cards, but not everyone wants travel rewards. If that’s your case, here are some cash back cards that can reap you solid rewards.

Now, when I swipe my American Express card, I’m making money off of my credit card company instead of the other way around, and it all started the day I asked myself the important question – ‘How do credit cards make money?’


I talked today about my experience falling into and getting out of credit card debt and about how the revelation of who was lending to me changed my borrowing behavior forever. What lessons have you learned about credit cards?


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John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.

Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.

Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.

Latest posts by John Schmoll (see all)


  • Holly@ClubThrifty says:

    They are an awesome tool when used correctly…but you’re right. They have gotten people into trouble since their creation!

    • Nicole@Frugal Rules says:

      Thanks for commenting, Holly. The fact that you can refer to credit cards as an awesome tool shows that you understand how they’re meant to be used – something John and I had to learn the hard way πŸ™‚

  • DC @ Young Adult Money says:

    I think a lot of people don’t realize they take a cut from the merchant, and that merchants build in this cost and pass it on to the consumer. That’s why I am SO big on cash back rewards. You get a piece of it back (not all of it) but if you pay in cash or with a debit card you are losing 100% of that built in cost that is being passed along to you.

    • Nicole@Frugal Rules says:

      Thanks for pointing that out DC. I haven’t thought about it that way before but it makes sense and is another good reason to make credit work for you rather than the other way around.

    • Chrissy says:

      The thing is, the fees charged retailers for using rewards cards is actually pushing the prices up as well. While the lowest volume plans card processors charge retailers are a flat percent per swipe, what most retailers get is a bit more complicated fee structure that depends on the type of card. Most people think of 2 types of cards, but there’s actually 3 types that the rates are based on, plus 2 -4 rates for each depending on how it’s used.

      First, the types of cards – Debit cards are the cheapest to process, followed by simple credit cards. If you’re using a rewards card, that’s the most expensive to process, it could be an extra 1-2% processing fee compared to a simple credit card. Also, some brands of cards are known to cost more to process than others.

      As far as processing, the most expensive is a hand keyed transaction. So, if your chip or magstripe are broken, or if you pay over the phone… they’re paying more. Next would be swiped. After that, some venders get lower rates for chip transactions. If they do, and there are 2 different rates, chip and pin will be the lowest, as it’s the lowest risk transaction using 2 factor authentication for the transaction (something you have – the card, and something you know – the pin).

      Most vendors have agreements with their card processors that they can’t charge more for paying with card, so their fees are hidden from the consumer.

  • Michelle says:

    Credit card companies definitely make a lot of money, and that’s one of the reason why I am all about cash back rewards!

    • Nicole@Frugal Rules says:

      Good point, Michelle. The fact that credit card companies can offer the rewards they do with certain cards is another evidence of the wealth of money they’re sitting on.

  • Mrs. Pop @ Planting Our Pennies says:

    Loving the wife’s perspective, John.

    I took control of all the credit in my name when I graduated college and immediately made sure I was not paying any interest since that felt like throwing money away.

    • Nicole@Frugal Rules says:

      Thanks for the comment Mrs. Pop. I couldn’t agree with you more about paying interest feeling like throwing your money away. Now if I could just get rid of that sick feeling in my stomach when I pay my mortgage bill each month…

      • Dan says:

        Thanks for the article. My wife and I pulled ourselves out of a ton of debt before buying a house. We avoided credit cards like the plague. Now that we’re in our new home, have a realistic budget that we actually stick to, we’re no longer fearful of taking advantage of reward cards – in fact it would be foolish not to!

        Regarding the interest on your mortgage, not sure what your APR is. Ours is pretty low at 3.6%, no PMI. I thought about paying down the house early because of the interest, but honestly(depending on your rate) you might be better off stuffing that same money away in retirement.

  • Jamie Dickinson says:

    Been there and learnt the hard way! Really easy to think its free money! What a naive thing to think. Holly is right though they can be very useful when used correctly.

    • Nicole@Frugal Rules says:

      So true, Jamie. It’s so easy to overspend when you don’t feel the expense right away. I think that’s how credit card companies have amassed their fortunes.

  • Mandy @ MoneyMasterMom says:

    Using a credit card is such a streamlined process that it doesn’t feel like your spending money. Then you get your bill and wonder how you could spend so much. Line by line you soon realize you did spend that much. A lot of people pay a portion and leave the rest as a problem for future-them. Unfortunately this is usually the first step in a complicated dance called the credit card shuffle πŸ™‚

    • Nicole@Frugal Rules says:

      Couldn’t agree with you more, Mandy. It is awful easy to swipe that card, especially when they don’t make you even sign the receipt. Having danced the credit card shuffle before, I never think of charging anything I don’t already have budgeted for anymore. πŸ™‚

  • Derek @ Freeat33 says:

    I once charged a dishwasher to my credit card knowing I didn’t have the cash to pay it. I really hated doing dishes, and somehow justified the purchase in my head. I had it paid off in a few months, and never carried a balance again πŸ™‚

    • Nicole@Frugal Rules says:

      Thanks, Derek. We have put somewhat large, unexpected expenses on credit cards before as well. We still do, but today we do so knowing that we have money set aside in our “home repair” fund to pay for it when the bill comes.

  • Veronica @ Pelican on Money says:

    When my brother went into credit card debt in his teens, YES teens, I learned that credit cards are not to be messed around with lightly. He was kind of a front man to take all the damage while I learned from his mistakes behind the front lines. Not sure why I’m relating this to a battle scene in my head but it helps every time I have to think about using the credit card.

    • Nicole@Frugal Rules says:

      Thanks for sharing, Veronica. One of the things John and I feel strongly about is helping our kids learn from our mistakes (with debt and all areas of life) which I suppose is something every parent wants to do for their kids. πŸ™‚ But, we so want them to use credit the right way from the start. Thankfully, we have another 13 years to show them how πŸ™‚

  • Grayson @ Debt RoundUp says:

    Oh, credit cards. They were the reason why I got into debt, well at least part of the reason. I was the main reason, but they helped. I now know how to harness the power of credit cards. I only use them when I have the money to pay them off. I enjoy the rewards, since they fund the 529 account that I setup for my soon-to-be-born son. It’s a win-win for me. The credit card companies still make money off of my purchases through swipe fees, so they don’t care. Great post Mrs. Frugal Rules!

    • Nicole@Frugal Rules says:

      What an awesome idea, Grayson! I love that you are using your credit card rewards to set up a 529 plan for your son! Congratulations on your soon to be new little blessing. I’ll be praying for a safe, healthy delivery for mom and baby πŸ™‚

  • Jason @ WorkSaveLive says:

    Great “guest” post Mrs. Frugal Rules! I definitely learned that handling credit cards poorly can quickly lead to disaster and they’re not very flexible when it comes to collecting on past due payments. Over draft fees rack up quickly, and when you’re behind on your payment the interest rates sky rocket and they add as many “fees” to your balance as they possibly can. Luckily for me, I finally got my head on straight and now work the system the best I can and take as much money from the companies as I can get! πŸ™‚

    • Nicole@Frugal Rules says:

      Thanks, Jason! It is so fun to be a part of John’s community and to see how much fun he’s having with the blog. It’s also neat to see him meeting people like you! Hopefully one day our paths will cross in person. In regards to credit card fees, yes you are so right, I remember those awful fees that seemed to come out of nowhere once we fell behind. That was one of the clearest signs to me that I was borrowing money from corporate thugs and should be more discerning with who I choose as a lender in the future. Having learned the hard way, we definitely use credit to our advantage now instead of being taken advantage of by the credit card companies.

  • Lance @ Money Life and More says:

    What I have learned about credit cards is if you use them responsibly you can make a ton of money from them and that is exactly what I do.

    • Nicole@Frugal Rules says:

      That’s true, Lance. Do you have a specific method or type of card you look for to make money when it comes to credit cards?

  • Gillian @ Money After Graduation says:

    Great post ! They do make a ton of money. I just choose to never make purchases I can’t immediately pay off, and get a bit of rewards for it!

    • Nicole@Frugal Rules says:

      Thanks, Gillian! You’re very smart for not making purchases you can’t immediately pay off. Getting rewards on top of that is icing on the cake!

  • Canadian Budget Binder says:

    Hi Nicole,
    Great post. I learned a while back from my mate at the Pizza Shop that he gets charged from the credit card company every time that someone swipes their credit card. I had no idea they had to pay and he says they often encourage them to pay cash if they can. Mrs.CBB says at the spa she used to go to and get her pedicure the same thing was told to her. They simply said “cash only” or debit. It doesn’t surprise me the way they make money, why, because they know they can. It’s lucrative and they aren’t going to miss the opportunity. Our credit cards offers rewards points etc but we pay no fees for our cards. We’ve never had credit card debt that we didn’t pay in full but of course all that pretty interest adds to the money pot. Mr.CBB

    • Nicole@Frugal Rules says:

      Thanks, Mr. CBB! I appreciate that. I have enjoyed your blog greatly, and your recipes! It’s fun to hear John clicking away when I’m making dinner some nights. I’ll ask him what he’s doing and he’ll tell me that he’s telling Mr. CBB what we’re having for dinner. πŸ™‚ Thanks for your comments on credit cards too. Glad you enjoyed the post.

  • Kurt @ Money Counselor says:

    The aim of credit card companies is to entice consumers into the high-interest debt trap, and ding them with various fees along the way. Card issuers whine about regulation, etc., but the explosion in the number and types of card issuers tells you just how lucrative the business can be.

    Club Thrifty is right–credit cards can be a useful tool, when used responsibly–but, as you discovered, card issuers are doing everything their marketing geniuses can think of to induce cardholders to be irresponsible! It takes a strong constitution to resist…

    • Nicole@Frugal Rules says:

      Right you are Kurt, and I agree, it is our responsibility as individual cardholders to not use the persuasiveness of creditors/lenders as an excuse for irresponsible self-indulgence. I just think especially as a parent, that it is my responsibility to teach my children not only how to be frugal, but how to use credit wisely so they don’t make naive assumptions about who they’re borrowing from or what they’re getting themselves into.

  • Cat says:

    To make sure to pay on time. My company was great actually. After I put the bills somewhere, and forgot to pay them on time, I called them up to see if they’d waive the interest (which they did). They then offered to set up automatic transfers.I still get paper bills so I can keep an eye on things, but the money goes out automatically – no more late payments!

  • K.K. @ Living Debt Free Rocks! says:

    Good post πŸ™‚ Both my husband and I use our credit cards for the majority of purchases but pay our cards in full well before the due date. I was once heavily in debt with credit cards and I truly learned my lesson. It also takes a serious shift in mindset to use credit cards responsibly and more so to use them to your advantages such as earning %rebates, miles, free travel insurance etc…and for some people they may be better off not using credit cards until they are in complete control of their spending habits and emotional triggers that would cause a credit card spending binge.

    • Nicole@Frugal Rules says:

      I agree K.K. A paradigm shift is required to move from thinking of plastic as a line of credit to indulge your desires to viewing credit cards as tools to use for your own advantage. The truth is, we need to establish good credit histories to get good mortgages and other things in life. So, we can’t just ignore credit. But as you suggest, for some, it may be better to cut the cards until they can control their spending.

  • Kathleen, Frugal Portland says:

    Credit cards make money on people like me, or at least past-me. I was paying $89/mo for some sort of service I didn’t remember opting for, and didn’t realize it until it had been over two years that I’d been paying that. Makes me a little sick to think about!

    • Nicole@Frugal Rules says:

      Thanks for commenting, Kathleen. Your experience strengthens my belief that Congress was right to enact the credit legislation that they did. Hopefully that will help people “see” the fees they’re being charged better.

  • Pauline says:

    Great post! I understand credit cards have to make money, but they are down right greedy. In France very few people use credit card, what we call “carte de crΓ©dit” is actually a debit card that will overdraw your account if your balance is insufficient. So most “credit cards” charge about $50 per year in fees. I thought it was normal until I moved to the UK and my cards were free. $50 per card adds up quickly, because people don’t do consumer debt, they have to be creative to charge something anyway.

    • Nicole@Frugal Rules says:

      Thanks, Pauline. I really enjoy your posts on life in Guatemala and appreciate you commenting on my post here. I didn’t know France handled credit so differently from the U.S. I think this is an area we could learn a lesson from our French friends and not be so consumer debt-driven as a society.

  • Mackenzie says:

    I’m still making payments on a credit card that we used for vet bills for my cat. Ugh…I can’t wait till this thing is paid off! But I’m glad my cat is healthy πŸ™‚

    • Nicole@Frugal Rules says:

      I’m sorry to hear that Mackenzie. We had a similar situation with our cat about nine years ago. It took a little while to pay off that debt but nearly a decade later, we’re thankful that we did it as we’ve enjoyed our time with him (and now, our three little kids get to enjoy him too) πŸ™‚

  • Justin@TheFrugalPath says:

    It’s insane how much businesses pay every year so their customers can use credit cards. I work for a small family owned business and my boss told me they pay over $100k per year just in transaction fees. That’s just insane.

  • Nicole@Frugal Rules says:

    Wow, Justin. That is nuts! Maybe your friends should look into Square. They have to give up a terminal but it might save them some money.

  • Kim@Eyesonthedollar says:

    My business pays about $6K in credit card fees per year and we have a sweet rate through a health care association. I can’t imagine how much places like Walmart or grocery stores pay. That being said, it’s worth 0.5-3% per transaction to get paid immediately. Sending bills after the fact or getting bounced checks costs lots more. From a personal perspective, we just paid off the last of our $30K in stupid credit card debt. What a wonderful feeling, and I will never feel bad about taking rewards points and not paying interest from now on. They’ve made enough money from our stupidity to last a lifetime. Hope to see more posts from you. Excellent job!

    • Nicole@Frugal Rules says:

      Thank you, Kim! I really enjoyed the post you did for Frugal Rules recently as well. It’s amazing to me to learn how much businesses pay to process credit card transactions but you have a very good point – getting paid immediately is worth it – something I’ve come to appreciate now more than ever since I am self-employed πŸ™‚

  • Brian Fourman says:

    I have learned that I spent considerably less and saved considerably more once I stopped using credit cards. For me, the risks outweighed the benefits.

  • femmefrugality says:

    I heard enough horror stories about this growing up that I didn’t get a card for a very, very long time as an adult. We carry a little bit of debt, which I’m not proud of, but it’s really not that much and we always find a way to pay it down before interest rates start to make the amount we owe become insurmountable. We really need to cut it all together, though.

    • Nicole@Frugal Rules says:

      Thanks for the comment. I can understand waiting to carry a credit card until later in life. I think future generations would be well-served if credit card marketers were pulled off college campuses altogether – that’s how my husband got into credit card trouble.

  • AverageJoe says:

    Sweet guest post! I’ve asked Cheryl to guest post and she thinks me suggesting it is just hilarious.

    The whole “they get commissions for selling my info” part really bothers me. I get it….but that’s the one that every time I think about it crosses the no-no line in my little brain.

    • Nicole@Frugal Rules says:

      Thanks, Joe! I say go ahead and ask Cheryl. I’d like to hear what she has to say! πŸ™‚ I see your point about feeling uncomfortable with salesmen making commissions off your personal information/habits/preferences. It makes us feel less like people and more like commodities, which in general is so unhealthy.

  • Daisy @ Money Smart Guides says:

    Really, if you think about it, credit cards are a brilliant business model for those organizations that offer them. One thing that I really hate about credit cards (and almost always refuse to get a card if they have it) is annual fees. Sometimes, though, the fee is less than the rewards that you can collect which is the exception. Even though credit cards can be very harmful for those who do not use them properly, I still think they can be a great tool for those people who can handle them.

  • Lynne says:

    I was terrible at paying my cc bill until I figured out that the great deal I just bought came with an extra 19% tagged on to the price (cc interest)!

  • John says:

    This is a really good post! I never think too much about how CC companies make their money. And when once of the ways is at our loss (paying interest) it really makes you think and question your own CC use.

  • Kayla @ Shoeaholicnomore says:

    It’s great to hear Nicole on the blog, I’d love to hear from her a little more often (not that I don’t enjoy John’s posts too) πŸ™‚

  • Luis says:

    Growing up when my parents taught me about credit cards and loans, the first thing they told me is that debt is evil. It really left a big impression on me and now that I’m in my early 20s I am avoiding unnecessary loans like the plague and paying off any CC/student loan debt like it’s a race. According to a credit score tracking company, my score is higher than 80-90% of people my age. It’s a really good feeling to have built my score up to the level it is at my age.

  • Douglas Antrim says:

    Credit Card companies do have a strategy to make money off of you. It seems to me a person should have a strategy to keep as much of their money as possible

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