For first time credit card users, it is always a wonder how credit cards make money. They are offered a credit line that they can pay for every month without any interest while enjoying benefits and rewards. It is very important for customers to understand how credit cards work and how credit card companies make money.
How credit cards work
While banks and financial institutions issue credit cards, card networks like Visa support the payment transactions for the credit card holders.
Issuers include banks like SBI, Axis, Citibank, HDFC, ICICI, RBL. When a credit card user swipes their credit card, it is the banks that are lending money to the user. Banks also allow retailers and vendors like Big Bazaar and Snapdeal to issue co-branded credit cards. Card networks provide payment infrastructure to banks to support all transactions. Some of the major card networks are Visa, RuPay, American Express, and Mastercard.
How credit card companies make money
How credit cards work is that customers become the focal point of issuer’s revenue model. Here are 6 ways credit card companies make money:
- Interest: Banks charge an interest for any balance amount that is unpaid after every month’s due date. The interest charges can be very hefty ranging all the way up to 50% APR. It is recommended for all credit card holders to pay off their monthly balances in full every month.
- Interchange Fee: Banks charge 1% to 3% in transaction fees from merchants for enabling customer payments.
- Annual Fees: Some credit cards charge customers an annual fee. Customers should always compare rewards benefits versus costs to ensure that an annual fee card is worth it.
- Cash withdrawal charges: Banks charge an additional charge outside interest to enable cash withdrawal from credit cards.
- Late payment fees: When customers are late on their monthly payments, banks have a late charge where credit card companies make money.
- Foreign Transaction fees: Some credit cards charge customers a transaction fee for every transaction made abroad. If you want to avoid transaction fees while traveling abroad, Learn more about the best forex options while traveling abroad.