How Do Credit Card Companies Make Money?

Credit cards are part and parcel of Singaporean life, offering perks and convenience. But ever wondered how the companies behind them actually profit? It's a blend of interest, fees, and what merchants pay. Knowing the ropes can help you play it smart with your cards and dodge those extra costs.

>> MORE: Credit card fees and how to avoid them

 In Singapore, the credit card ecosystem involves key players: issuers and networks.

• Issuers: These are the financial institutions that provide you with your credit cards. Major banks in Singapore like DBS, OCBC, UOB, and Citibank, act as issuers. When you use a credit card, you're essentially borrowing money from these issuers. Many retailers also offer "co-branded" cards, which are typically issued by a bank in partnership with the retailer.

• Networks: These are the companies that facilitate credit card transactions. In Singapore, we've got the big global players: Visa, Mastercard, and American Express. They handle the money and info flowing between banks and shops.

>> MORE: How does a credit card work

Of course, the Monetary Authority of Singapore (MAS) keeps everyone in check. They set the rules to keep our financial system solid, protect us consumers, and make sure things are fair. This includes stuff like how interest rates are shown, fee structures, and responsible lending.

>> MORE: How to choose a credit card

Credit card companies rake in money from a few different places, with both us as the cardholders and the shops we buy from chipping in.

Interest

This is how banks get profit from credit cards. If you carry a balance over to the next month, you'll be paying interest on what you owe.

• Interest rates in Singapore can vary depending on your card and your credit score. Typically, you might see rates around 25% to 30% per year.

• Just paying the minimum each month? That'll drag out your debt and seriously ramp up the total interest you'll pay. This is one way banks make money from credit cards.

>> MORE: Best high-value credit cards in Singapore

Fees

Credit card companies also have various fees, which help them with how banks make a profit from credit cards. These include:

• Annual Fees: Many cards, especially the ones with top rewards, have annual fees. In Singapore, these can range from zero for basic cards to S$300 or more for premium ones.

• Cash Advance Fees: Getting cash advances with your card? That'll cost you, often around 6-8% of the amount (with a minimum, say, S$15).

• Late Payment Fees: Miss the payment deadline, and you'll likely get a late fee. MAS sets limits on these, and they're usually around S$100.

• Foreign Transaction Fees: Using your card overseas or for foreign online purchases can add extra charges. For example, DBS Visa/Mastercard might charge up to 3.25% on the transaction.

>> MORE: When to pay your credit card annual fee

Interchange

Whenever you use your credit card at a shop or online, the merchant pays a processing charge. A portion of this charge, known as the "interchange fee," flows to the bank that issued your card via the payment network. Typically, this fee ranges from a small percentage of the transaction, and the exact amount is determined by the payment networks. Factors like the type of credit card, the total amount of the purchase, and the kind of business all play a role in setting the interchange fee.

These fees can influence how merchants set their prices, as they might include these costs in what they charge you. Additionally, some merchants might choose not to accept certain credit cards if the interchange fees are too high for their business.

Remember, you're in control! Credit card companies rely on us, but you can minimise what they make from you. Here's how to avoid those extra charges:

• Paying your balance in full and on time is the best way to avoid interest. This is especially important when thinking about the best time to pay off your credit card.

• Keep an emergency fund. Having one means you won't need those costly cash advances when push comes to shove.

• Look for cards without annual fees or ask for a waiver.

• Set up reminders or automatic payments to avoid late fees.

• Use cards with no foreign transaction fees when travelling.

>> MORE: 4 ways to pay off credit card debt in Singapore

>> Tired of paying extra to credit card companies? Learn how to cut down on hidden fees and keep more money in your pocket!