Credit card companies make a lot of money. In fact, the Federal Reserve reports that earnings from credit cards are almost always higher than returns on all commercial bank activities.
How the Credit Card Companies Make Money
When discussing the credit card company, or the credit card industry, we are really discussing the banks that back the credit cards – the bank you owe your credit card debt to. Now, let’s explore how the credit card industry makes so much money.
- Late fees
- Over-the-credit-limit fees
- Balance-transfer fees
- Cash-advance fees
- Annual fees
- Interest on the revolving debt carried forward
- Compounded interest
- Transaction payments – a cut of the purchase price from the merchants we make our purchases from (typically ranging from 1 to 4 percent of the total purchase price)
Between the fees charged to cardholders, accruing interest, and transaction fees charged to merchants, credit card companies make billions of dollars annually.
Why Credit Card Companies Love Your Minimum Monthly Payment
Credit card companies make a fortune in interest off of consumers who make only their minimum payment each month. In fact, if you are consistently making only your minimum monthly payment that is a red flag that it is time to consider filing for bankruptcy.
The minimum payment is the smallest amount of your balance you can pay and still meet the terms of your credit card agreement. Typically, the minimum payment amount is calculated off of a percentage of the total balance. For example, your minimum monthly payment might represent as little as 1 or 2 percent of the total balance you owe.
The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 requires credit card statements to have a minimum payment warning. The credit card issuer must disclose on your statement: how long it would take and how much it would cost to pay off your balance in full if you make only the minimum monthly payment. The calculation is based on no new charges being made.
An Example of the Massive Cost of Paying Only Your Minimum Monthly Payment
Assume you are carrying a credit card balance of $1,500 with an annual percentage rate (APR) of 18%. Assume also during this time period you make no additional purchases on the card.
- Monthly Minimum Payment: $37.00
- Number of Months To Pay Off Debt: 160 (that’s over 13 years!)
- Total Interest Charges During 160 Month Payback Period: $1,792.52
By paying just the minimum payment due each month on $1,500 of debt, it would take over 13 years to pay off the debt and you would pay more in interest charges ($1,792.52) over the life of the debt than the principle amount borrowed.
Bankruptcy Stops These Exorbitant Charges!
Bankruptcy puts an end to the fees charged to cardholders and accruing interest. It erases debts owed to the credit card company. Bankruptcy allows people to get out from under the weight of debilitating debt that would otherwise have lasted many years.
Bankruptcy is a powerful legal tool that can help you in many ways. To further explore how bankruptcy can help you and if it is your best debt relief option, read our articles:
- 4 Signs that Bankruptcy is Your Best Debt Relief Option
- When Bankruptcy is the Best Choice
- Top 5 Things To Know About Bankruptcy
- You Have Bankruptcy Questions, We Have Answers
How Can Bankruptcy Help Me?
We’re committed to helping people get out of debt and gain the financial freedom they deserve. We invite you to learn more about who we are here. If you live in Savannah, GA or the surrounding areas and have questions about your debt relief options, let’s meet for a free consultation.
Find out more about being debt free in our guide: All About Debt Relief
We are a debt relief agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.