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Starve a bank, feed your pocket

By , CardRatings contributor
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Credit card fees: how banks make money from you

In 2010, Bank of America reported revenues of over $25.5 billion from their global card services business, of which nearly $18 billion, or about 70 percent, came from interest. That percentage has remained fairly consistent in the credit card industry over the past decade.

A year earlier, in the last two quarters of 2009, Capital One Bank reported nearly $5.5 billion in credit card revenues with close to $3.5 billion, or almost 65 percent, coming from net interest income.

And a 2001 study of banks issuing Visa or MasterCard, as reported by Sonecon.com, noted that 70 percent of credit card-related revenues came from finance charges, 15 percent from interchange fees, 12 percent from penalties and cash-advance fees, and 3 percent from annual membership. How can you keep more of those billions in your pocket?

4 ways to pay less credit card interest

  1. Pay down the balance. "The simple solution to paying less in interest is not to run a balance. If you don't pay interest they don't make money," says Howard Dvorkin of Consolidated Credit Services in Fort Lauderdale, Fla. Unfortunately, for millions of Americans it's not that simple. For a steadily growing number of consumers who regularly carry a balance, shopping for the best credit card interest rate has become routine.
  2. Pay on time. "Making bill payments on time can improve your credit rating and lead to a lower interest rate. If you can't make regular payments in full every month, pay as much as you can early in the month," advises Dvorkin. "There's no use stretching it out and inadvertently spending the money elsewhere. Also itemize each bills to make sure you are not paying more than you should," he adds.
  3. Claim hardship. "Hardships can lower your interest rate," says Michael Reilly, founder and CEO of Emerge America LLC, debt relief specialists in Roslyn Heights, Long Island. "If you make at least the minimum payments on time and are dealing with a separation, divorce, mental issue, physical issue or a job loss, they can put you in a hardship program," says Reilly, who is in the business of settling unsecured debt and credit card debt.
  4. Settle your debt. "I deal with the creditors on a daily basis and the credit card companies are now doing something they've shunned for decades, settling debts at pennies on the dollar," says Reilly. "Our company averages about $0.42 on the dollar right now. People don't want to default on their debt, but at least now the credit card companies are willing to take something, rather than watching the bankruptcy rates and filings soar," he says.

3 credit card fees you can minimize

Next to interest income, credit card companies make significant revenue from cardholder fees. Shopping for the best credit card fees is only part of the solution. Avoiding three of the most common fees can also put more credit company profit back in your pocket.

  1. Annual fees. Some cards charge an annual membership fee to cover costs of perks offered. If you're not getting your money's worth from those perks, it may be time to look for one of the many credit cards that come with no annual fee.
  2. Late fees. In August 2010, the Federal Reserve Board capped late fees at $25. While that limits the damage, cardholders still run the risk of higher interest rates and lower credit scores by making late payments. Even "no late fee" credit card offers can backfire since credit card companies will typically make up for the offer with higher interest rates. The best way to avoid late fees is by using automatic online payments or adjusting credit card payment schedules so they do not coincide with rent or other major monthly expenses.
  3. Over-limit fees. You must "opt in" to over-limit fees or you will have your card rejected upon reaching the card limit. While over-limit fees can no longer exceed the amount of the purchase creating the over-limit charge, they can certainly add up. Opting out and carrying some cash is one option if you often straddle your limit. Otherwise, opting in means intentionally limiting credit card use later in the month.

Merchant transaction fees

Also known as interchange fees, the remaining key source of revenue for credit card companies comes from merchants who pay a percentage on each sale. Visa charges average about 1.8 percent per transaction, while American Express averages around 2.5 percent. Additional fees charged to merchants can bring such totals up to 3 percent per transaction, which is typically passed along to consumers in the form of higher prices.

There's not much you can do about merchant fees, other than to stop using your credit card and simply pay cash. If your credit is maxed out, that may be a strategy you're employing anyway. But if you're financially healthy, paying cash does nothing for your credit score…and a good credit score can save you hundreds or even thousands of dollars in interest on a major purchase that you're not likely to pay cash for, such as a home or a new car.

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