Before you can get a credit card, you have to have an issuing bank approve you and agree to let you use its money to make purchases on the promise that you'll pay it back. Banks benefit from issuing credit cards in tangible ways that directly increase their profitability, but also in intangible ways that increase your loyalty as a customer.
When banks issue credit cards, they're essentially lending you money to make purchases. You pay them back when you get your statement. If you don't pay in full each month, the bank charges you interest -- often at very high rate. According to Bankrate.com, as of January 2014, the average fixed rate credit card charged over 13 percent and the average variable rate card charged over 15.3 percent.
Credit Card Fees
Credit cards are notorious for having a number of potential fees associated with them, sometimes even one just for having the card, known as the annual fee. Other times, fees are associated with specific transactions, like cash advances or international transactions. Some of the fees are penalties for things like going over your credit limit or making a late payment. These various fees all pad the issuing bank's bottom line.
When a merchant swipes the credit card as your form of payment, the merchant has to pay a fee that gets divided between the credit card issuer and the network -- which in some cases are the same entity. For example, Discover and American Express are both the issuer and the network, while Visa and MasterCard are networks that share the merchant fees with a variety of banks that issue their cards.
Banks also benefit from issuing credit cards in a more intangible way by increasing your affinity for the brand. By offering you a credit card in addition to savings and checking accounts, for example, the bank can help you with your various financial needs. And if you've already got all your financial eggs in a basket at one bank, then you're more likely to use that same bank again when you need additional financial products, like a car loan or mortgage.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."