Finance: How Do Credit Card Companies Work?

How do credit card companies work? Credit card companies are, in a way, lenders. They give consumers a rectangular piece of plastic that allows them to charge purchases. The companies put limits on cards depending on how much the consumer can realistically pay back so they don’t get screwed. Another way they don’t get screwed (and make a bunch of money) is by charging interest...and the interest rates charged by credit card companies are massive.

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Transcript

00:25

awesome content. thank you very much. that $20 charge carries about a 1% hit. from

00:30

the credit card company that is the hard-working elves here at shmoop only

00:35

keep about nineteen dollars and 80 cents from that twenty you just paid. credit [equation]

00:39

card companies need to pay for their jets right? well that one transaction was

00:44

just 20 cents but there are gujilion's of them so the dough adds up to billions

00:49

and billions really fast. unless do you think the job of being a credit card

00:53

company is easy, note that every few thousand transactions is done by some

00:59

bad actor like no different kind of bad actor. you know meaning of theif someone

01:04

behaving badly they've stolen your card and if race to Best Buy [man runs out of store carrying TV]

01:08

hoping to abscond with ten flat screens to sell on the street corner and make a

01:13

fast buck. while the credit card company is generally responsible for those

01:17

frauds against mankind and have to hunt down the bad guys .so that's one way

01:21

they make money. the other way credit card companies get paid is that they get

01:25

money from consumers who use them either directly or indirectly directly. means

01:30

something like an annual fee. and then there are charges well you know that is

01:36

if you don't pay off your credit card bill each month you carry what is called [credit card rates listed]

01:41

a balance. and on those amounts you pay huge interest. like for many buyers on

01:46

credit the fee is 15 to 20 percent per year these days and sometimes more. so if

01:52

you bought a thousand dollar television set with your 20% credit card and didn't

01:55

pay it off for three years you'd have paid $200 a year in interest for three

02:00

years or $600. do you think Visa Mastercard or Amex pay 20% interest for

02:07

the money they borrow to lend to you? hardly they pay very very low interest

02:12

rates like just a few percent in there so on the [visa employees pictured]

02:15

20% they charge you an interest to punish you for not paying off your

02:19

credit card their cost is more like 2% I either making like an 18% spread or

02:25

profit margin on that money. the 600 bucks you paid for renting the grand for

02:31

3 years from the kindly loving people at visa

02:34

Oh made visa over 500 bucks on that money nice. work if you can get it and [equation]

02:39

you know a really nice jet.