How do Credit Card Companies Make Money

How do Credit Card Companies Make Money

Credit card companies need people who spend more than they can afford, but they don’t do it by default. In this way, they can benefit by targeting those who are most prone to cognitive failure. Here is the dark side of economic behavior.

Card issuers and banks, in particular, benefit from penalty fees when people pay their credit card balances late.

Here is not how they make money; With MasterCard and Visa, they charge merchants a commission for the use of their payment services and other commissions on transactions such as transfers. But the majority of their business model grants customers a 12-14% loan.

Now, why would a customer borrow at such rates? If you want to buy a house, you can get a mortgage of around 3.5%. If you are going to buy a car, you can get a loan of between 1 and 3%.

How do Credit Card Companies Make Money

Saving money to buy these items is easy most of the time since items such as furniture and accessories are much cheaper. If you have your first job and need to use credit cards to finance your apartment, you can spend more than you can pay immediately, but not every day.

The only reasonable and customary use I can think of for not paying a credit card balance is with medical expenses. These costs increase suddenly and can be significant, even with health insurance.

In 2012, a New York Times survey found that low to moderate-income households had more than 6,600 credit card debts for medical expenses. In the United States, however, the total debt of consumer credit cards exceeds this number.

Here means that there are a lot of people who buy things with credit cards and cannot pay for these items at the end of the month and decide to pay off the monthly loan instead. Paying 12-14% is an expensive option, but some people do.

Why? Okay, so you won’t find an explanation in economics that they are all rational, and it makes sense that people only borrow when they do.

But economic behavior is loaded with examples of myopia, lack of self-control, and excessive optimism about its future. This behavioral bias may not affect everyone, but many people are undoubtedly vulnerable, especially the poor and less educated.

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Credit card companies need people who spend more than they can afford, but they don’t do it by default. Therefore, they can benefit from targeting individuals more prone to cognitive failure. Here is the dark side of economic behavior.

How do Credit Card Companies Make Money

A new study by economist Antoinette Shore of the Massachusetts Institute of Technology and Hong Ru of the Nanyang University of Technology has found such a result. The authors use information from a private company that monitors credit card offers. Less-educated consumers – generally less advanced in financial matters – are more likely to accept requests that include deferred payments.

These are plans that start with lower rates, but then increase, and the excess fees are excessive and beyond the limit, accumulating debts and possibly paying higher interest. Meanwhile, homes with higher education generally do not adopt these plans.

In the rational world, it can be tough for credit card issuers to earn money when people only pay high-interest rates when they need it. They still charge commissions to businesses, but they are not always profitable without the ability to exploit people’s miscalculations.

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