Interest is a major source of income for many banks that issue credit cards. And as President Trump continues to push his proposed 10% cap on credit card interest rates, banks are pushing back.
In a joint statement released earlier this month, banking industry groups said “a 10% interest rate cap would reduce credit availability and be devastating for millions of American families and small business owners who rely on and value their credit cards, the very consumers this proposal intends to help.”
On Wednesday, Trump urged Congress to pass legislation to cap credit card interest rates at 10% for one year, speaking at the World Economic Forum in Davos, Switzerland.
JPMorgan Chase CEO Jamie Dimon warned that Trump’s proposed rate cap “would be an economic disaster.” Dimon proposed testing the cap in just two states, Vermont and Massachusetts, rather than imposing the change nationwide.
Interest is a big part of how credit card companies make money (especially with today’s very high APRs), but it’s not the only factor — or the only charge you should know about as a credit card user.
Read more: What Trump’s 10% cap on interest rates would mean for credit cardholders
To understand how credit card companies make money, it’s important to understand their different roles. Any credit card you own will have both an issuer and a network.
A credit card issuer is the bank that issues your card. Common issuers include Chase, Capital One, and Bank of America, but your local credit union or regional bank can also be a credit card issuer. Credit card issuers determine the interest rate on your account and charge other fees, including annual fees, late fees, and balance transfer fees.
Credit card networks help facilitate the payments you make with your card. In the U.S., the major credit card networks are Visa, Mastercard, American Express, and Discover. Credit card networks help process transactions and facilitate purchases between the bank that issues your card and the merchant where you make your purchase.
American Express and Discover are unique because they are both issuers and networks.
There are three primary ways a credit card company makes money: processing fees, interest charges, and other fees for cardholders.
Each time you use a credit card to make a purchase, there are processing fees involved. According to a Federal Reserve report from 2022, this “transaction function” of credit cards isn’t the most profitable because of the cost of rewards and other expenses — but the main source of revenue from credit card transactions is interchange fees.
Interchange fees are paid by the merchant’s bank to your credit card issuer. The merchant often covers this charge with their own fee from the bank. However, interchange fees are set by card networks and vary depending on the type of merchant, the type of card used, and other factors. These fees are typically a percentage of the purchase plus a flat fee amount.
Another processing fee is an assessment fee charged by credit card networks for servicing the transaction.
As a cardholder, you may be affected by interchange fees when you make a purchase. Some stores or online sellers may add a convenience fee to credit card purchases, offer a cash discount for customers not using a card payment, or set a minimum purchase amount for credit cards.
Interest charges are important for credit card issuers. According to the same Fed report as above, the “credit function” of credit cards (of which interest is the primary revenue source) makes up 80% of credit card profitability.
Most credit cards have variable APRs within a range — for example, between 17.99% and 28.99% APR. When you’re approved for a new card, you’ll be assigned an ongoing APR within that range. Because the APR is “variable,” your issuer can change it over time.
Your credit history can affect your interest rate, as can changes in federal interest rates. APRs aren’t directly tied to the federal funds rate, but when the Fed raises rates, you’ll often see credit card issuers’ APRs increase, too. Right now, the average credit card interest rate for cards with revolving balances is 22.3% APR.
One reason credit card interest is so costly is because it compounds daily. Each day, your average daily balance accrues interest at the daily periodic interest rate. This can lead to a much bigger amount owed in a short period of time.
Even if interest rates are capped at 10%, you could still end up paying a significant amount of interest on your balances. If you have a $2,000 credit card balance, a 10% APR, and you pay $100 per month toward your card, for instance, you’ll still pay almost $200 in interest over 22 months before you pay the balance in full.
Interest charges may make up a large portion of revenue for credit card companies, but other fees can add up too.
Here are a few more common credit card fees you should know:
-
Annual fees: Credit card annual fees can range from under $100 to more than $800. This is essentially a fee you pay to own the card and is most common among rewards credit cards. If you do pay an annual fee, make sure you’re getting enough value from the rewards and benefits to make up the cost every year.
-
Balance transfer fees: Some credit cards offer 0% APR for balance transfers over an introductory period. When you take advantage of a balance transfer offer to pay down existing debt, you’ll often have to pay a balance transfer fee. This fee costs between 3% and 5% of your total transferred balance.
-
Late payment fees: If you don’t pay at least your minimum balance due by the due date each month, your card issuer may charge a late fee. Some cards waive these fees, but they typically cost up to $40 per late payment.
-
Foreign transaction fees: You can take on a foreign transaction fee if you use your credit card to make a purchase in another country or with a merchant that’s based abroad. Many travel credit cards waive foreign transaction fees, but they may cost as much as 3% of each international purchase.
-
Cash advance fees: Cash advances allow you to borrow money from your credit card’s line of credit. When you take out a cash advance, you’ll pay a fee (usually 5% of the advance amount) and take on a cash advance APR, which may be more than your card’s regular ongoing APR.
One of the best ways to avoid credit card fees is to pay your balances in full and on time each month. When you pay on time, you don’t have to worry about fees for late payments or penalty APRs, and paying the balance in full will keep interest from accruing on your account. Even better, this will help you build and maintain a great credit score.
If you already have credit card debt, consider using a balance transfer card to pay it off. Many top balance transfer credit cards have 0% APR periods lasting 12-18 months or even more. If you can work to pay your balance off in full over that time (before the regular APR kicks in), you’ll avoid interest charges altogether.
Using a balance transfer card to pay down debt, however, is also how you take on a balance transfer fee. Make sure you compare different card options to find the lowest fee that still offers a good introductory period.
Other types of fees will depend on how you use your card. If you travel abroad often, for example, and want to use your credit card for purchases, make sure to look for a card with no foreign transaction fees. You can save yourself as much as 3% each time you use your card internationally.
