How Credit Cards Work

     First, you’ve got the credit card companies, such as Discover Card, Visa, MasterCard, American Express, which are generally referred to as “networks.” Then you’ve got the banks that issue these cards, referred to as “issuers.” But, as you may know already, Discover Card and American Express are a different kind of network. While Visa and MasterCard are associated with hundreds of member banks around the country which issue their own unique versions of these cards, Discover and American Express currently operate through their own bank—so they are both network and issuer all rolled into one.

     When you talk about credit card companies, you’re still talking about two things: networks (the credit card company) and issuers (the financial arm, or the bank that carries the loan). The issuers charge cardholders interest on their purchases and cash transactions. All issuers pick from a range of potential fees - for cash advances, late payment, and so forth. Some issuers also charge an annual fee just for the privilege of carrying their card. Credit card companies also make some money from the merchant side.

      When you use your card at a store, for example, they charge that store a fee for each credit card sale. This money goes to the network, the issuer, and others in between.
MasterCard and Visa also make money by charging the banks who issue their cards an “association fee” - that is, a fee to be “associated” with them.

     Credit cards are essentially a loan. The credit card company “loans” you the money to make a purchase. Then you repay the company. If you pay within the grace period, you only pay the original purchase amount. If you wait longer to pay, the purchase gains interest. This is why paying only the minimum payment each month, instead of paying down the account, will leave you in debt. You can reduce your credit card debt by consolidating your credit debts into one account with lower interest and lower monthly payments.