I, like many other wet-behind-the-ears college students trying to
make their way in the world, applied for and received my first credit
card about a year and a half ago. At first, I wondered how on
Earth my credit card company could make money off of someone like
me. Sure, I used the card for practically everything: groceries,
textbooks, clothes. But I paid off the balance religiously
practically every month. So, they weren't making anything off of me, except for a few piddly cents of interest every year from the times when I actually carried a balance.
Then it hit me, just a few nights ago, as my boss explained the finer points of managing the massive overhead
that is the liability of every restaurant: basically, credit card
companies don't make money off their customers. Instead, they make
money off merchants. Even if the customer is a
goody-two-shoes like me, who almost never carries a balance, they still
make money off of me, however indirectly.
You see, in order to accept credit cards as payment at their
businesses, merchants have to open an account with the credit card
company in question. For every transaction made by credit card, the
merchant must pay a transaction fee, either a flat fee of a few
cents, or a specific percentage of the charge (usually in the
neighborhood of 3%). It's not unusual for both to be used
simultaneously — shaogo kindly informed me that the credit card
companies of which he is a client charge 15 cents across the board. On
top of that, American Express charges him 3.5%, and Mastercard and
Visa both charge him 1.8%.
So, to give you an example: I go to a gas station that accepts my
particular credit card, and purchase $11.00 worth of goods. The credit
card company charges the merchant, say, 30 cents for the transaction, and
by that, makes the bulk of its income. Even if I carry the balance of
the $11.00 over to the next month, only a wickedly usurious interest
rate will match the transaction charge applied to the merchant's
account.
This is often why many businesses (in violation of many card companies' contracts) require a minimum purchase to
pay
by credit card, and why some businesses have eschewed credit cards
altogether; all those transaction fees add up, forcing businesses to
raise prices (or absorb the loss). So, indirectly, despite my not being
charged interest for my purchases, the credit card companies still make
money off me.
Now, sometimes, credit cards will offer suspiciously good deals to
customers, like cash back programs, interest grace periods, frequent
flyer miles or 'points'. They can afford to do so, because they
don't make the bulk of their money directly off of you, the consumer; they make most of their money by charging merchants for
the privilege of using their cards. They can afford to give you a few
dollars back for every couple of hundred you spend, because the
transaction fees are more than enough to put them in the black.
Thanks to TenMinJoe for pointing out that my original example
of a merchant charge of $3.00 was off by a factor of ten and suggesting
a far more reasonable fee of 30 cents, or roughly 3% of the total
transaction. Also, thanks to shaogo for pointing out that many credit
card companies, such as American Express, specifically forbid their
clients to require customers to make a minimum purchase if paying by
credit.