Credit card companies are among the wealthiest businesses in the world. It's not surprising when you consider the scope of their influence. There are few adults who don't have at least one credit card in their wallets, and many count several among their treasure trove. While credit cards are enormously convenient, that convenience could come at a high cost if you're not aware of the ways that credit card companies make their money. Knowing how credit card companies make their money is more than an exercise in fulfilling your curiosity. It can help you save money by knowing what little tricks to avoid and how to find the card that will fill your needs without draining your wallet.
- Interest
The most visible way that credit card companies make money is through the interest that they charge you on carried balances. Those bits of plastic carry notoriously high interest rates in comparison to other consumer loans - as much as 20% higher than personal loans or a personal line of credit. You can reduce the amount of interest that you pay to the companies by paying off your balance each month, and by starting with a low interest card to begin with. - Fees and late payments
One late payment can cost you a lot - and for a lot longer than you think. The government finances office recently ruled that banks may only charge you for reasonable administrative fees for late payments on loans, with £12 set as an upper limit. Credit card companies are expected to follow suit - but the actual late fee is only part of the penalty you pay for being late on your account. Far more damaging is the typical hike in interest rate, which can increase the APR that you pay by as much as 20%. - Universal default clauses
More and more creditors, including credit card companies, are using "universal default" clauses in their contracts. In essence, ANY late payment on ANY account can trigger a higher rate of interest on your credit cards. That means that you not only have to keep your card account current - you need to keep ALL of your accounts, including utilities, current to avoid triggering higher interest rates on your credit cards. - Inactivity charges
If you think you can avoid paying fees and interest to the credit card company by not using the card, think again. Many credit cards have "inactivity charges" that kick in if you haven't used your card within a specified amount of time. Yes, they sometimes charge you for NOT using their card. - Payment allocation
Many credit cards carry several different interest rates, based on how you incurred the debt. You may pay 12% for carried balances and new purchases, 1.5% for balance transfers and 28% for cash advances. Your account balance generally combines all of them to give you one total amount owed - but when you pay your account, the money is not divided evenly between the three debts. In fact, if you pay £300 toward your account balance, the entire three hundred will be plunked down against the balance transfer, which carries the LOWEST interest rate. That leaves the other parts of your balance to accrue interest for the lender at far higher rates of interest.
Credit cards are certainly a major convenience, but there's no sense in paying more to your card company than you need to pay. If you'd like to reduce the amount of money that you pay out each month, take a look at the various types of credit cards available at a comparison site. When you know what to compare, choosing the best credit card for your use is easy.
