The payments on the debt alone were more than $100 billion. That is a lot of money and it’s a fair question to ask where it all went.
The American credit card industry is very complex and we have a lot to learn. We’ll start by looking at everyone involved.
Now that we have a good understanding of the roles, let’s take a look at where the money goes within the credit card industry. We will start with you, the cardholder.
There are many costs in the form of interest and fees that are paid by the cardholder.
To be clear, once you start making interest payments, you are paying above and beyond the cost of your purchase.
Here is an example. You use your credit card to purchase a new flat screen TV for $1000. Congratulations, I am sure you will get many thousands of hours of enjoyment from your new TV.
If you pay off the TV before your credit card’s grace period has expired, you won’t pay one penny in interest. You might even get some cash back rewards or frequent flyer points for your purchase. The credit card network and banks make a few dollars off of the fees they charge each other, but that is all paid by the merchant who sold you the TV.
However, if you plan on making only minimum payments on that $1000 and your interest rate is 13%, you will end up spending much more than the $1000 purchase price on your new TV. After 8.4 years of minimum payments (101 months at $20.83 per month) you will have paid $1,605.10 for your TV. When you were standing in the aisle looking at that TV, would you have thought the full cost of $1,605.10 was a good price to pay for that $1,000 TV? That’s a 60% increase in the cost of the TV and all of it went to the card issuing bank.
After the cardholder makes a purchase using a credit card, the merchant sends the transaction’s details to the issuing bank via his own bank (merchant’s bank aka the acquiring bank). The credit card issuer processes the transaction and, transmits the money charged by the cardholder back to the merchant’s bank once a day, less any interchange fees charged by the credit card issuer and processing fees charged by the merchant’s bank.
By the time the transaction makes the loop from the merchant, to the issuing bank, to the merchant’s bank, and back to the merchant, the merchant will receive only $97.50 ($100.00 less 2% and less $0.50.) That 2% – 3% that he did not get back is the merchant’s cost for letting you pay with a credit card.
Why would a merchant be willing to lose 2% to 3% on every credit card purchase you make? The simple answer is that he is not. The merchant simply builds that cost into the price he charges you for the TV. He also knows that if you can pay with a credit card, you won’t’ feel as much pain as you would if you had to pay with cash from your pocket. Less pain means that you will probably be willing to buy more from him or pay a higher price.
The card issuing bank has costs of its own.
The credit card network does not pay any fees for any of the transactions that occur during the entire credit card purchase process. Instead, the network’s expenses represent the enormous cost of buying equipment, software and hiring people to operate, administer, and maintain the credit card network and oversee the process. These costs as well as the credit card networks profits come from the pennies per transaction fees and association fees that it collects from the card issuing bank. Millions of credit card transactions add up to a lot of pennies.
After learning more than you expected about the credit card industry, we can sum it all up as follows:
Financial health happens when you partner with IRIS! Securely submit your financial information to IRIS and receive a free, comprehensive financial plan within hours! This plan is reviewed by one of our live Certified Financial Specialists. It's the first step on your journey to financial health!