More Money Generated With The Credit Card

Nearly everyone knows that little piece of plastic is really a money mint for the credit card companies but do you or those companies themselves really know how much money they do actually generate?

Why we ask the question of the companies themselves is because these companies have literally grown up creating more income sources for themselves without really knowing where it is all going to end.

In this short article we are not really going to examine the profits that accrue in the basic money generating system of the card companies which of course is the interest they are charging their customers on the money they are lending them to shop using their credit card. Here we will only mention the fact that they are charging much more interest on the loaned money than almost any other form of loan one can get into.

One must actually understand when we say ‘much more’ that we are understating the facts by a long way. If a credit card company is only charging 4% more than your average bank’s interest rate it does not seem too bad. But if you understand what it really means, it isn’t that good. If a bank has a prime rate of 10% that means you can borrow money yourself at that rate and if you were to pay it back at 14% it would be a 40% return on that money. Not a bad return on any commodity or product.

However, many credit card companies are charging much more than given in that example, and many people who see the credit card companies charging 20% interest think of them only making 10% on the money should sit down and work it out to see what they are really getting on the money lent at that rate.

One of the very grey areas your average person does not know much about is the amount of money these credit card businesses charge the merchants to process the sales. The merchant being the retailer your credit card holder is purchasing from. Here, the credit card company is getting a percentage of each sale and this can vary from less than 1% to 5%. This works out to an awful lot of money, and many companies that make massive investments in people, products and market share would be happy to get a total return in this region from their entire business.

Remember, this is only one stream of income for the credit card company.

Another area that they seem to take the average person to the cleaners with is items like insurance premiums; whether on their own services, or for products the credit card holder is purchasing. Because insurance premiums are normal calculated on an annual basis, and the insurance companies know the average person can only afford to pay at a monthly rate, they offer very attractive monthly terms themselves – very often working out to be an interest free monthly rate.

The credit card company will charge the amount for the annual premium and add interest on to this debt they have just created for the cardholder. On top of this, they could be acting as an agent for the insurance company and thus get a commission on the premium the cardholder is paying too. To add insult to injury, they could even negotiate better terms with the insurance company and the credit card holder could end up paying interest on a loan he has in fact floated!

The trouble why this kind of thing goes on is because some of these companies have become so large that people are assigned to looking after only an aspect or division of the credit card company and only see what is happening in their area. Very few people understand, or have clear picture of, the entire operation of a credit card company - and so this will continue.