Sunday, September 5, 2010

How Credit Card Companies Make Money

Credit card users may be classified into two major types: revolvers who usually only make minimum monthly payments, and transactors who always pay the total amount due. Revolvers are at the heart of the credit card business and are the favorite customers of credit card companies, who make a bundle by charging around 3% interest per month on unpaid balances (and new transactions, read the fine print). In contrast, by paying the total balance every time, transactors avoid paying interest and benefit from the use of "free credit."

As consumers become more and more financially informed and savvy, more and more credit card users shift from being revolvers to transactors. Does this spell the end for the credit card industry, as we know it? Do credit card companies really get nothing out of these free-riding transactors? See the infographic below to find out.

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