Earn cash back at gas stations. Earn airline miles at restaurants. It seems like rewards credit cards are everywhere. In fact, cardholders with rewards cards had a combined total rewards balance of $33 billion at the end of 2022.

Even though credit card rewards programs are common — 84% of credit card users have at least one rewards card — credit card companies remain enormously profitable. But how do credit card companies make money if they provide rewards? These companies make significant amounts of money through credit card interest charges and added fees.

Understanding how credit card companies make money and adjusting how you use your card can minimize how much you pay them.

Credit card networks vs. issuers

To understand the credit card industry, the first thing to know is that there are credit card networks and credit card issuers.

• Credit card network: A credit card network is the company that connects merchants and financial institutions issuing the cards. The network is what authorizes and settles credit card transactions. In the United States, there are four major credit card networks: American Express, Discover, Mastercard, and Visa.

• Credit card issuer: Issuers are banks, credit unions, or other financial institutions that provide cards directly to customers. The issuer is who reviews your application, sets the card's terms, and sets your credit limit. According to the Consumer Financial Protection Bureau (CFPB), there are nearly 4,000 issuers in the United States. The largest issuers include American Express, Bank of America, Capital One, Chase, Citi, and Discover.

For example, the Chase Sapphire Preferred® Card is issued by Chase but operates on the Visa network, while the Blue Cash Preferred® Card from American Express is both issued by American Express and on the American Express network.

As a consumer, you likely never think about how involved a process it is to use a credit card. But there are many steps that happen whenever you use your card. When you make a purchase online or in person, the retailer sends a request to the credit card issuer through the specific credit card network. When the issuer receives the transaction, it approves or denies it and responds through the network. Once this process is complete, the card issuer pays the retailer for the amount of the transaction. The whole process takes just seconds.

How do credit card companies make money?

As mentioned earlier, credit cards are profitable. The CFPB reported that credit card returns exceed the returns of all other bank activities.

At the end of 2022, credit card debt exceeded $1 trillion for the first time, and consumers paid credit card companies over $130 billion. Credit card companies make money in three core ways:

1. Interest income

When you carry a balance on a credit card — meaning you don't pay off the balance in full by the due date and carry it over to the following statement cycle — you pay interest to the credit card issuers. According to the Government Accountability Office, approximately 45% of card users carry a balance, so a significant portion of users pay credit card interest.

And interest charges can be significant. The average annual percentage rate (APR) for credit cards that assessed interest was 22.77%. How does that affect your repayment? Consider this example:

Jane has a $1,000 balance on a credit card at 22.77% APR, and her minimum monthly payment is $30. If she only pays the minimum each month, it would take her 52 months to pay off her card, and she'd pay a total of $1,559.61. The card's APR would cause her to repay more than $550 in interest charges to her credit card issuer.

2. Interchange income

When you use a credit card to make a purchase or pay for a service, the retailer has to pay the credit card network a fee to facilitate the transaction. This fee — known as an interchange fee — ranges from 1% to 3% of the transaction amount.

The fee comes out of the retailer's pocket, so that's why some retailers will give you a discount for using cash rather than a credit card; it's less expensive for them, and they keep more of their profits.

The revenue from interchange fees is substantial. Credit card companies make enough money from interchange fees to completely cover the cost of credit card issuers' rewards programs.

3. Fee income

Credit card fees are common, and there can be a variety of fees you'll potentially pay your issuer:

• Annual fees: Some cards, particularly premium travel or rewards cards, charge annual fees. Users pay the fee even if they don't use the card, so it's a consistent source of income for credit card issuers. Fees can range anywhere from $95 to $695 per year.

• Balance transfer fees: When you transfer a balance from one credit card account to another, you have to pay a balance transfer fee — a percentage of the amount transferred. Balance transfer fees vary by card, but they're generally 3% to 5% of the transfer amount.

• Cash advance fees: You can tap into your credit limit to get an upfront lump sum of cash, but you'll have to pay your credit card issuer a fee for the privilege. The cash advance fee is typically 5% of the advance amount or $10, whichever is greater.

• Foreign transaction fees: You must pay a foreign transaction fee on most cards when you use your card while traveling in another country or making purchases online in foreign currency. Fees vary, but you can expect to pay 2% to 3% of the transaction amount.

• Late fees: When you miss a payment due date — even if you're just a few hours late — the card issuer will charge you a late fee. Card issuers determine their own fees, but some charge as much as $41.

5 ways to reduce your credit card costs

Now that you know how credit card companies make money, you can change how you use your card and manage your credit to reduce how much you pay in interest and fees. To save money, follow these steps:

1. Pay your statement balance in full

Credit cards typically have a grace period — several days between when your billing statement closes and your payment is due. If you pay off the statement balance in full by the due date, no interest accrues, and you won't have to pay any interest charges to the issuer.

2. Choose a card without an annual fee

Not all cards charge annual fees. Many rewards cards are available without annual fees, so you can still earn valuable cash back, points, or airline miles without paying fees. Here are a few examples of no annual fee cards that earn rewards across different programs today:

• Capital One Savor Cash Rewards Credit Card

• Hilton Honors American Express Card (see rates and fees)

• Instacart Mastercard®

• Delta SkyMiles® Blue American Express Card (see rates and fees)

3. Avoid cash advances

Although a cash advance may seem like an easy and convenient way to get money upfront, they are an expensive form of credit. Not only will you have to pay a cash advance fee on the amount advanced, you'll also have to pay a higher APR on the advance.

Instead, try to use your card to pay your bills, or use payment transfer apps like Venmo or Zelle.

4. Set up payment reminders

Late fees can be costly. And when you miss a payment, some issuers will raise your APR to the penalty APR — a substantially higher rate, so more interest accrues faster. Set up payment reminders on your phone or calendar so you don't forget, or sign up for automatic payments for at least the minimum owed.

5. Improve your credit

If you improve your credit score, you can qualify for cards with lower fees and rates. You may be able to negotiate with your current credit card issuer to get a reduced APR to retain you as a customer.

To bolster your credit, aim to keep your credit card balances as low as possible and make all your monthly payments on time.

Read more: See our picks for the best American Express credit cards

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