Definition and Example of a Credit Card Issuer
A credit card issuer is a bank or credit union that offers credit cards and grants credit limits to cardholders who meet certain criteria. The credit card issuer is considered the lender, and it is often a bank or credit union that provides credit in the form of credit cards. Credit card issuers differ from payment processing networks like Visa and MasterCard. American Express and Discover operate as both credit card issuers and payment processing networks. The credit card issuer profits by charging interest if you carry a balance, along with fees such as annual fees or balance transfer fees.
How a Credit Card Issuer Works
The credit card issuer decides who qualifies for its cards. They take into account several factors when making their decision, such as the creditworthiness of the cardholder, how the card is used, and more. If you have a higher credit score, you may be able to access cards with lower rates or those that offer rewards such as airline miles or cash-back.
Most credit card issuers have grace periods on purchases, which means that if you pay your balance in full each month, you won’t be charged any interest. A rewards card can be a tool for getting discounts as long as you don’t carry a balance.
However, carrying a balance can lead to interest charges that negate the value of any rewards you earn. For example, if you have a $5,000 balance on a card with a 20% annual interest rate, the credit card issuer will charge you $83.33 in interest in the first month. If you don’t pay the minimum payment, the interest for the next month will be higher, as it will be calculated based on the new higher balance of $5,083.33.
Even if you pay $100, your new balance will still be $4,983.33. The interest charged on that amount will be $83.05, which is less than $0.30 lower than the previous month.
Credit Card Issuer Fees
When you carry a balance on your credit card, you pay interest to the credit card issuer. But even if you pay off your balance in full each month, the credit card issuer can still earn money by charging you fees. Some common fees include:
- Annual fees
- Late payment fees
- Balance transfer fees
- Foreign transaction fees
Your credit card agreement will specify the fees you may incur for certain transactions and what those amounts will be. Some may be a flat dollar amount. Other fees may be a percentage of the purchases you make.
Credit card issuers also charge merchants fees. Every time you swipe your card, the merchant must pay a fee ranging from 1% to 3% based on your transaction and the type of card you are using. Credit card issuers must split these fees with the payment processing network.
Sources:
Statista. “Number of American Express credit cards in the U.S. and worldwide from 2013 to 2020.”
Statista. “Largest credit card companies in the United States in 2019 and 2020, by number of active accounts.” Accessed December 10, 2021.
Federal Deposit Insurance Corporation. “FDIC law, regulations, related statutes, and rules.” Accessed December 10, 2021.
MyFICO. “What is in my FICO reports?” Accessed December 10, 2021.
Consumer Financial Protection Bureau. “How does a credit card company calculate the interest amount due?” Accessed December 10, 2021.
Source: https://www.thebalancemoney.com/credit-card-issuer-959984
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