Students need to understand the business models behind credit card companies as well as other financial service companies. Why? It provides a roadmap for consumers as to how they should use the financial product to AVOID becoming a profitable part of that business model. NerdWallet has a report out about credit card trends, which included this chart showing how credit card companies make money:

Here are the definitions that help to explain the terms in the chart:

Credit card revenue comes from three main sources:

1. Interest paid by cardholders who carry a balance from month to month.
2. Service fees. These include annual fees as well as charges for balance transfers, foreign transactions, cash advances, late payments, returned checks and so on.
3. Interchange fees that merchants pay to accept credit cards — usually 2% to 3% of each transaction.

Questions for students:

• Which of the three main sources of revenue for card companies are paid by consumers?
  • Trick question: While merchants pay interchange fees, they typically mark-up their goods to cover that cost which is why you will often see them offer discounts when customers use cash. Ultimately, directly or indirectly, consumers pay for all three.
• Which revenue source is most important for credit card companies?
• How can a cardholder avoid paying interest and service fees to card companies?
• Which source of revenue is growing fastest? What two factors could be influencing that?

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Check out this NGPF Activity: Should They Open A Credit Card Account?

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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