It all comes down to one thing. You guessed it — money.
At the end of the day, banks are businesses and their goal is to make money. Credit cards and personal loans are a lucrative way for them to do that.
Just because a bank or financial institution offers you a credit card or loan (maybe they’re offering you pre-approval or a signup bonus) it doesn’t mean you have to take them up on it. Only take one on if it aligns with your financial goals and you’re confident you can manage it responsibly.
How do banks make money from credit cards and loans? Here are three ways they do it:
Interest: When you use a credit card or take out a loan, you’re borrowing money from the bank. In return, you agree to pay back the amount you borrowed plus extra money called interest. This interest is how banks make a profit. They charge you interest on the amount you owe, and the longer you take to pay it back, the more interest you end up paying.
Fees: Banks also make money from various fees associated with credit cards and loans. These fees can include annual fees, late payment fees, balance transfer fees, cash advance fees, and more. Even if you don’t carry a balance on your credit card, the bank still earns revenue from these fees.
Penalties: If you miss a payment or fail to repay your loan according to the terms of the agreement, banks can charge penalties or additional fees. These penalties add to the bank’s revenue stream.
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