How do banks earn with credit cards?

Different people have different perceptions of credit cards. To some, it is convenient as you do not have to carry cash. For others, it is a quick and easy way to spend money. Just swipe the card to purchase anything, anytime, anywhere. Almost all banks offer various types of credit cards to meet financial needs.

You can use your credit card for buying groceries, booking a movie ticket, buying home appliances, shopping online, paying your mobile bills, clothing and accessories, and more. All businesses that offer goods or services accept them as a mode of payment.

Furthermore, credit cards can help you build a good credit score and earn rewards and cashback offers. Use your credit card for daily expenses and collect rewards points to redeem for gift cards, cash back, or even travel miles. Thus, considering all the benefits and perks, how do banks make money from credit cards?

1. Merchant fees

The retailer doesn’t get the entire amount when you make an online credit card payment. Banks may charge the merchants an interchange fee, a small percentage of their purchase amount.

Even though this may only represent 2% -3% of the transaction amount, banks benefit from this revenue stream due to the number of transactions a day. However, note that interchange fees can vary widely depending on your credit card issuer, merchant category, payment method, and type of card you use.

2. Credit card fees

Many banks allow you to apply for a credit card for free, but they can charge annual fees, balance transfer fees, cash advance (withdrawal) fees, foreign transactions fees, late payment fees, etc. Some of these charges, such as annual fees, are levied regardless of whether the card is used. Here, IDFC FIRST Bank can be the right choice for you to choose from different types of cards with zero annual fees.

3. Finance and interest charges

For banks, interest generates handsome revenues. It can come from people who fail to pay their bills on time. Furthermore, credit cards in India charge interest rates between 22% and 49% per year, making them one of the most expensive forms of borrowing.

Also, it is important to remember that not every bank may sanction a credit card loan. Leading banks like IDFC FIRST Bank can get you an easy loan against your credit card. With an IDFC FIRST Bank credit card, you can get better interest rates from 0.75% to 3.5% per month. Moreover, the credit card interest rates may be adjusted if you have a long relationship with the bank and a good credit card usage history.

A bank’s earnings from credit cards come from both cardholders and merchants. From cardholders, the profit mostly comes from interest fees. However, banks can also earn from transaction, annual, and penalty fees. There is nothing unusual about these charges, but as a customer you can avoid paying extra money by paying all bills on time and using your credit card strategically.

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