How do credit cards make money when many people pay them nothing?

A credit card makes money from two different customers: you and the shop. The first source is the one everyone knows. A credit card lets you build a continuing debt balance, charged interest at a set rate. A card issuer that charges 15 percent while paying 5 percent to borrow the money earns a 10 percent net interest spread on what cardholders carry.

The second source is hidden in plain sight. Each time a card is used, the shop pays a fee. The customer's bank, the issuer, deducts an interchange fee from what it pays the merchant's bank, and that bank passes the merchant the sale minus the fee and a small extra charge of its own. The fees are set by the card networks. In the United States the interchange fee averages about 2 percent of a sale, while the EU capped it at 0.3 percent for credit cards. For a typical issuer, interchange may be about a quarter of total revenues.

So issuers need two kinds of customers, whom analysts call transactors and revolvers. Transactors pay their bill in full, so they cause shops to pay fees but pay no interest. Revolvers carry a balance from month to month and pay interest. Between them is the grace period, the time you have to pay before interest starts, usually 20 to 55 days. In a typical example, if even $1 of a $1,000 purchase is left unpaid, interest is charged on the full $1,000 from the purchase date.

The system was a business puzzle first. In 1958, Bank of America mailed a BankAmericard to 60,000 residents of Fresno, California, all at once. Shoppers did not want a card few shops would take, and shops did not want a card few shoppers carried, so the bank solved both at once.