By Adam Jusko, ProudMoney.com, adam@proudmoney.com
One of the concerns people sometimes have with credit cards is that their account might be closed for good behavior — namely, paying off the full balance on their credit card each month. After all, if you’re always paying off your balance in full, the credit card company isn’t making any interest money off of you, right?
Well, the bank that issues your credit card might prefer if you carried a balance every so often, but in truth you are still a valuable customer to them even if you don’t — and you still make them money. (And as long as you make them money, they won’t close your credit card account!)
Credit Card Companies Do Make Money from Full-Balance Payers
As long as you are using your credit card each month, you are making money for the credit card company, even if you always pay off your balances. Why? Because the bank that issues your credit card doesn’t only make money from interest that is charged to you. They also make money from the merchants that accept your credit card.
Every time you pay with a credit card, the bank gets a little bit of money from what is called an interchange fee. The grocery store or gas station or online retailer or even medical doctor that accepts your credit card agrees to have a small percentage of that payment sent to the bank as a way to compensate the bank for processing the transaction.
For example, if you bought $120 of groceries from your local supermarket, the interchange fee on that purchase might be 1.5%, or $1.80. In that case, the supermarket gets to keep $118.20 of the $120 they charged you, and the other $1.80 is the interchange fee that gets split between the card processor (Mastercard, Visa, etc.) and the bank that issues your credit card (Chase, Bank of America, etc.).
So, even if you pay off your full balance each month, you can see that the credit card companies are still making money — it’s just not coming out of your pocket! (Although you could easily argue that those interchange fees cause merchants to slightly increase prices, creating a sort of “invisible” charge to the customer.)
But, Inactivity Often WILL Lead to a Credit Card Shutdown
Now, while paying off your full credit card balance every month is just fine (and highly recommended!), what could cause your credit card account to be closed is if you rarely or never use the card. As we just explained, the bank makes money off of those interchange fees, but they only get those fees if you make purchases with the card. If you never use the card, or maybe use it once every three months for a $10 purchase, then you’re not bringing them much profit. At some point, they might look at your account and say, “We could make more money if we gave this credit to a different person who will actually use their card!”
Why do banks care if your card account stays open if you don’t use it? It’s not costing them anything, right? Well, yes and no. If the bank has given you a credit card with a $4000 limit and you never use it, that doesn’t directly hurt them. However, there’s always the chance that you could use it, so they have that potential liability on their financial statement.
Banks often want to have an upper limit on how much total credit they offer to their customers as a whole. If they reach that limit, the only way to give out new credit is to close some unused accounts in order to free up credit lines that could be given to new customers. If you haven’t been using your card, you’re one of the customers who will get the letter saying your account has been closed.
Good-Paying Customers Actually Help The Credit Card Company
As we’ve already said, your credit card company might prefer that you carry a balance and pay them some interest, but there is another upside for them when a customer regularly pays in full. Paying your balance in full shows that you are generally a trustworthy customer and that you are unlikely to default (walk away without paying your balance). Banks need to have as many trustworthy customers as possible to balance out the small percentage that will default. If their defaults get too high, government regulators may force them to hold more money in reserve to account for potential losses — and money put into reserve is not being put to work to make the bank more money!
So, you paying your balance in full is actually doing the bank a favor! Well, sort of. They’d still like you to pay some interest once in a while.