Do Credit Card Companies Like When You Pay in Full?

Most people think that paying off your credit card bill in full every month is the smart thing to do. But how do credit card companies feel about customers who pay off their balances early versus those who don’t? Let’s find out if credit card companies would rather you pay off your balances early or late.

How Credit Card Companies Make Money

First, it’s important to understand how credit card companies generate revenue. There are several ways credit card issuers earn money:

• Interest charges – This is the biggest source of revenue. When customers carry a balance, credit card companies charge interest on that balance. The higher the interest rate and the bigger the balance, the more money the issuer makes.

• Annual fees – Some credit cards charge cardholders an annual fee just for having the card Annual fees range from $0 to hundreds of dollars

• Penalty fees – Late payment fees, over-limit fees, returned payment fees etc. generate sizable revenue

• Interchange fees – Every time a credit card is used to make a purchase, the merchant pays an interchange fee (usually 1-3% of transaction amount). The card network keeps a portion of this fee and passes the rest to the issuing bank.

Do Issuers Prefer Customers Who Pay Interest?

Credit card companies make the most money when people use their cards and pay interest on balances. In fact, people in the business world make fun of people who pay their bills on time every month by calling them “deadbeats.”

On the surface, it would seem that issuers want all customers to pay interest and be in debt. But in reality, it’s more nuanced than that. Here are a few reasons why:

• Credit risk: Customers who pay in full are safer because they don’t take out loans. To keep risk in check, issuers still want a lot of these “deadbeats” in their portfolio.

• Regulations – Regulations like the CARD Act have curbed some of the most egregious practices in the credit card industry. Issuers have to be more careful in pursuing only profit.

• Competition—There are a lot of credit card companies, so there is a lot of tough competition. Issuers want to attract and retain customers. If they overtly punish pay-in-full customers, it could backfire.

So while generating interest income is important, issuers also have to balance risk, regulations and competitive forces.

Pros and Cons for Customers of Paying in Full

Customers who religiously pay their credit card bills in full every month derive several benefits:

Pros of paying in full

• Avoid interest charges
• Improve credit score
• Simplify finances
• Earn rewards

Cons of paying in full

• Potentially lower credit limit
• Risk of card closure from inactivity
• Require budgeting discipline

As you can see, the pros of paying in full outweigh the cons for most customers. You avoid wasting money on interest, improve your credit, and simplify finances by staying debt-free.

How Issuers Make Money from Customers Who Pay in Full

If a customer pays their bill in full and never carries a balance, how does the credit card company earn anything from them? Here are some ways they still generate revenue:

• Interchange fees – Remember the small percentage of each transaction amount that goes to the issuer? This adds up over millions of transactions.

• Annual fees – Issuers can charge annual fees on pay-in-full customers to ensure profitability. Cards with lucrative rewards often have annual fees.

• Penalty fees – Situations like a late payment or over-limit fee can still arise. Many pay-in-full customers incur some fees.

• Other fees – Foreign transaction fees, balance transfer fees, cash advance fees bring in revenue.

• Relationships – The card issuer has opportunities to cross-sell other lending products to these customers.

So credit card companies have adapted their business models to extract revenues from transactors who avoid interest.

The Bottom Line

While credit card issuers prefer customers who pay some interest, they also see the value in “deadbeats” who pay in full. The industry has struck a balance by monetizing pay-in-full customers through fees and interchange revenues.

For most consumers, paying off their credit card bills in full and on time every month remains the smartest habit. It saves on interest costs, avoids debt, and builds your credit score. Credit card companies have found ways to make money from transactors, so you need not feel guilty about avoiding interest and being a “deadbeat”. Ultimately, doing what’s best for your own financial health should be the priority.

Frequently Asked Questions

Do credit card companies close accounts for customers who pay in full?

It is rare for issuers to close accounts solely for consistently paying in full. However, they may close accounts that are completely inactive for months or years. The solution is to make sure you use your card periodically by putting a small monthly recurring charge on it.

How does carrying a balance help credit card companies?

Carrying a balance means paying ongoing interest charges to the issuer. This recurring revenue stream is the biggest way card issuers generate income. Even a small balance at a high interest rate can be profitable for the company.

Is it bad to pay off credit cards completely?

No, it is not bad at all. Paying in full avoids wasting money on interest and prevents you from falling into credit card debt. Your credit score also benefits from on-time payment in full every month. Just be sure to not let your account stay inactive for too long.

Should credit limits be lowered for customers who don’t carry a balance?

Issuers usually only lower credit limits when they see signs of increased risk. Paying bills on time actually reduces your risk profile. But very high limits may be decreased if the cardholder rarely uses their available credit. The key is occasional card usage.

How much do credit card companies profit from transactors?

Though they generate less revenue than revolvers, issuers still earn well from transactors. Interchange fees from transactions are estimated to be around $50 billion annually in the US. Fees can also add up, along with opportunities to cross-sell other lending products over time.