How do credit card companies make money?

In the past few years, credit cards have become increasingly popular in India. Public sector banks and private banking institutions have introduced a range of credit cards for customers of different types of needs. HDFC credit cards and SBI cards are the two companies with the largest market share. Although banks are prepared to provide you with small loans in the form of credit cards, do you want to know how these banking institutions make money from these companies?

The three main ways for card issuers to make money are through the card's annual fee, late payment of interest, skipping EMI fines, and so on. At the same time, they also benefit from the business of accepting these cards. Businesses need to pay transaction fees to banks, which can also make up for significant gains from card-issuing banks.

But before we delve into how to make money, let us first understand the term "credit card company." Credit card issuers and credit card networks can be easily confused. The issuer is the bank or financial institution from which you obtained the card. You are getting a loan from the card issuer and paying them. A credit card issuing company is usually a bank. On the other hand, a credit card network refers to a company that processes transactions. Currently, India has three main networks - VISA, Master Card and RuPay. In addition, American Express and Discover cards can be found.

Therefore, when you use a credit card to conduct a transaction, your funds will be electronically moved from your bank to the merchant bank over the network.

How do credit card companies make money?

As mentioned above, your bank makes money primarily through merchants who make payments with you and cards issued by banks. Banks or financial institutions make money in the following forms:

cost

Banks charge cardholders different types of fees - some fees are paid by everyone, while other types of fees are conditioned. Let us talk about these fees and charges -

• annual fee - from
  
   You must pay an annual fee for your credit card, especially if you are an elite cardholder and enjoy a higher benefit than the average user. This will be paid by all users. However, some banks may set a fee-based annual fee reversal plan.
• Cash advance fee - from
  
   When you withdraw money from an ATM using a credit card, the bank charges a minimum fee, usually associated with the amount you withdraw. This is also included in the income of the card issuer.
• Expired fine - from
  
   If you delay payment of EMI, your card issuer will charge you. Banks make more money from late payers in the form of late fees.
• Balance Transfer Fee - from
  
   When you transfer your outstanding balance from one card to another, the bank charges you a fee, which in turn becomes your income.

interest

The bank or financial institution just gave you a credit line. You must pay interest on the loan provided to you by credit card. This interest cost increases your spending and is a way to make money. Credit card interest is charged daily as long as the amount in your account has not been settled. That's why experts always recommend that you pay the unpaid amount in full each month, because any unpaid amount will generate interest.

Let us understand this with an example. Assume that the billing date is the fourth day of the month and the payment due date is 29 days of each month. Annual interest rate = 24%

1. March 10 - Clothing shopping - Rs. 5000
2. March 13 - Bill payment - Rs. 2000
3. March 19 - Gadget purchase [converted to 6 months EMI] - Rs. 12000
4. March 22 - Catering Bill - Rs. 1000

Now considering that this person has no unpaid amount, he will have to pay the rupee. [5,000 + 1,000 + 2,000 +2000] = Rs. 10,000.

This will be the total amount due on March 29. Now, if the person chooses to pay only the rupee. 6,000, the rest of the rupee. 4,000 will accumulate interest on a daily basis until the full amount is paid. Consider that the user pays the rupee again. On April 10, 2,000, let's see how interest costs work -

Interest = [unpaid amount x 2% x 12 months per month] * [days] 365

In this case, the total interest charged is Rs. 52.60 This is the sum of the rupees. 4,000 outstanding 11 days and rupees. There are 18 days of unpaid 18 days before the next payment. That's why those who pay only the minimum amount payable quickly fall into debt. Cardholders should also note that if the amount on your statement has not been settled, the new purchase you make will not be eligible for the interest-free period. That's why interest charges are the easiest way for banks to make money from your credit card.

Merchant exchange fee

When you use your card at the merchant terminal, the merchant will also pay the bank a certain percentage of the amount as a handling fee. This will also be added to the bank's revenue. It typically accounts for 1% to 3% of the value of the transaction, but may vary from merchant to merchant.

How to avoid paying too much money to the bank?

Savvy customers plan their transactions and payments in such a way that they must pay the bank the least amount. These are the habits you can take to reduce costs -

• Paying all outstanding balances every month; it is not a good habit to pay only the minimum amount.
• Set a reminder for your payment due date to avoid missing payments, which requires a late fee.
• Establish a contingency fund to replace the more expensive options such as credit card prepaid cash.
• Choose a low annual fee or a free credit card, even if you choose a card with a higher annual fee, make sure the reward is worth it.

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