The average American has four credit cards and there are millions of registered card holders in the country. Credit cards allow people to conveniently earn money without making a trip to the bank and when their paycheck comes in, they can easily pay off any accumulated credit card debt. Credit card companies make a lot of money by facilitating the convenient access to money. Here is a breakdown how credit card companies make money when people use credit cards.
Interest charges
When you use your credit card, you automatically borrow money from the credit card company. They charge interest on the borrowed funds since they are in the business of lending and that is why the card holder is usually charged more than they spend. The companies use credit scores to determine the level of interest that every individual will pay. Those with good credit scores are charged lower interest while those with poor credit scores are charged higher interest. This approach aims to encourage people to monitor and improve their credit score so they are charged lower interest.
Balance transfers
Many people find themselves with more than one card so they can make ends meet. However, taking on too much credit card debt can be dangerous because it becomes difficult and expensive to keep up with the repayments. One of the best solutions to easing repayments is debt consolidation where one transfers their debt to a single card for easier repayments at lower rates. Transferring your credit card debt from one card to another attracts transfer fees usually charged as a percentage of the total balance.
ATM withdrawals
Withdrawing money from ATMs through your credit card is treated as a cash advance and it usually attracts a hefty 5% cash advance fee. On top of that you will have to pay some ATM fees which add to the overall fees charged. Consider using this approach only for emergency reasons rather than regularly to avoid expensive fees.
Over-limit charges
Your credit card will also attract hefty charges when your card is charged beyond the approved limit. However, this ability to surpass your limit is usually provided as an option. It is best to avoid that option if you want to optimize your credit card game.
Many of the credit card fees are avoidable especially if you can pay off your credit card debt on time. Avoiding them will cumulatively save you a lot of money.
