Banks Earn a Ton in Credit Card Fees: Here’s How to Avoid Them
Credit cards are very lucrative products for banks. Despite numerous laws passed to regulate credit cards over the last several years, issuers still generate over $200 billion in credit card fees and interest each year. But many people, especially those who consider themselves money savvy, never pay a dime to their credit card issuer. Here’s a breakdown of where that money comes from, and how you can avoid paying more than you should.
Banks in the US generate over $140 billion annually in credit card interest payments. For banks, interest payments are a way to be compensated for lending you money today at the risk of default or loss of value in the future. Bankers continue to use credit cards as an efficient, quick way to lend money to consumers at higher interest rates (Average APR, 14.9%).
Banks provide credit card customers with a grace period where they can pay off their balance at no cost, so you can avoid interest charges by paying your bills in full and on time. However, most Americans typically tend to extend their credit card debt beyond the 21+ day grace period. As of March 2016, total US consumer credit card debt reached $951.6 billion. This means that the average American household carries a credit card balance above $16,000. $16,000 might seem like a manageable number, but credit card debt can quickly skyrocket. With high interest rates and compounding, the interest payments alone may become unmanageable for many.
Banks want you to build a large credit card balance in order to make money from your interest payments. To prevent this from happening, only spend what you can afford and pay off your balance each month.
In addition to interest, several other credit card fees allow issuers to earn more revenue, both from the cardholder and the merchants that accept the cards. These fees include:
This is the money paid by the merchant (e.g. owner of a restaurant) when a customer makes a payment. They account for the service offered by credit card companies and credit card issuing banks for processing the transaction. The Federal Reserve Bank of Kansas City estimated the amount merchants pay credit card issuers to be around 1.7% for each credit card transaction. Amounting to $50 billion, interchange fees are the largest source of non-interest income for banks.
Credit card issuers use the revenue generated from these interchange fees to fund their rewards programs. In 2015, Capital One used their nearly $5 billion in annual revenue from interchange fees to entirely fund their rewards expenses of $2.7 billion.
While small retailers are allowed to ask for a credit card minimum of up to $10, merchants are prohibited from adding additional fees for credit card purchases without telling the consumer the fee beforehand – and in 9 states, they are prohibited from charging more for credit at all. In practice, charging more for credit is extremely rare except for gas stations in the other 41 states . While many claim that consumers are affected indirectly as interchange fees may result in higher prices for everyone, you should never have to pay more for using credit vs debit.
Pretty self-explanatory, annual fees are the amount a credit card user has to pay every year for the use of a credit card. This is a fixed amount that varies depending on the type of credit card and the issuing bank. It is important to remember, though, that many cards come with no annual fee. Nonetheless, American customers pay close to $8 billion annually to banks in the form of annual fees, and often do not fully take advantage of the benefits they pay for.
“The number of rewards cards transactions we’re seeing doesn’t correlate with the number of people getting rewards. People aren’t using all the rewards they have.” – Henry Helgeson, CEO of Cayan
Do not overpay in annual fees for benefits you will not take advantage of. Become informed and find a card without an annual fee unless you are confident the rewards will outweigh the cost.
Cash Advance Fees
Cash advance fees account for the luxury to withdraw cash from an ATM on credit. Because of the convenience and efficiency of cash advances, this transaction typically carries a hefty fee along with additional finance charges. American consumers pay banks over $200 million annually in cash advance fees alone (excluding finance charges).
Be sure to never overlook the price you have to pay for a cash advance. Ideally, set aside some money every month to build a reserve in case of an emergency. Cash advances are a quick way for banks to make money both through fees and added interest charges. Don’t make it that easy for them!
Foreign Exchange Fees
This is an added fee that some banks charge its credit card users for transactions or purchases made overseas. If you are someone who travels frequently then find credit cards with no foreign exchange fees.
Late Payment Fees
Even waiting one day after the due date to pay your credit card bill can result in a penalty of $25 or more. Continually disregarding the due date for monthly credit card payments can lead to increasing fees. Annually, American customers cough up about $7 billion in late payment charges.
Avoiding late payment fees is a very quick way to stop giving extra money away to banks. Use Debitize to stop worrying about when to make your credit card payments.