How do banks make money from credit cards? Here are four ways

Credit cards are one of the easiest ways to buy your favorite products without having to pay cash right away. But what does this mean for the banks that offer you credit? What profit do they get from lending you money? Or do they have to wait until the due date to get their money back?

With the growing number of credit card Every year, it has become a very important source of income for the bank and therefore issuing a credit card is as beneficial for the bank as it is for the card user. The main sources of income for banks through credit cards include merchant fees, interest amounts, marketing linkage fees and other forms of charges.

Below are some ways banks make money through credit cards:

Credit card interest rate

Credit card Interest or finance charges are fees charged by banks for lending money. They are also known as the annual percentage rate (APR) and are calculated as a percentage of the total money borrowed.

Here’s what it means for banks and credit card users:

Banks: Finance charges or interest on credit cards are a major source of income for banks. The interest rate on credit cards ranges from 30 to 48 percent per year.

Users: High interest rates make credit cards one of the most expensive ways to borrow money. Interest is charged daily on the amount to be repaid. Users should check interest rates with banks and estimate the cost of borrowing before getting a credit card.

Commercial rates for companies

A charge that is imposed on business Accepting credit cards as a form of payment is known as a merchant fee. Banks charge a fee every time a credit card payment is made, and therefore the entire transaction amount does not go to the merchants. The merchant fee is shared between the banks and the credit card processing networks.

Here’s what it means for banks and credit card users:

Banks: The fees charged by merchants are usually minimal, ranging from 2 to 3 percent. However, the volume of credit card transactions is a good source of income for the bank.

Users: This fee does not affect credit card users, as it is charged to businesses that accept credit card payments.

Marketing Linkage Charges

Co-branded credit cards, issued by banks in collaboration with brands or service providers, charge marketing linkage fees. These cards offer various benefits. By partnering with banks, brands try to reach more customers by offering them various rewards and discounts. A fee is charged for providing offers and rewards.

Here’s what it means for banks and credit card users:

Banks: Linkage fees generate revenue for banks.

Users: They should opt for co-branded cards only if they frequently shop at the brand, as the marketing linking fee should not cost more than the rewards and benefits offered by the bank.

Other credit card fees and charges

Credit cards incur various charges for customers, such as withdrawal fees, annual fees, late payment fees, balance transfer fees, foreign transaction fees, etc.

Withdrawal fees: This fee is charged when cash is withdrawn using a credit card. It is usually 2.5 to 3 percent of the total transaction amount.

Annual fee: It is a fee charged each year to maintain the credit card. It varies from bank to bank.

Balance Transfer Fee: A fee of between 3 and 5 percent is charged when transferring debt from one credit card to another. However, some banks do not charge balance transfer fees or waive them later.

Foreign transaction feesCredit card users pay fees for transactions made in foreign currency, which vary between 1 and 3 percent.

Late payment feeBanks charge a late fee if a credit card user fails to pay the minimum amount before the due date. However, banks offer certain concessions on this fee, which ranges from 14 to 40 percent.

Here’s what it means for banks and credit card users:

Banks: They generate revenue through various fees; depending on the nature of the transaction, these fees are charged to all users or to some of them.

Users: These fees act as a cost of the loan for the credit card user. Before obtaining a credit card, it is best to check with the issuing bank about the various fees to avoid unexpected charges on financial transactions.

Choose a credit card that offers affordable fees and fits your financial needs. To get the best credit card deals, you should compare the fees charged by different banks and choose the most affordable one.

The many ways banks make money through credit cards should be viewed as a fee or cost for the convenience of using a credit card. However, users should be rational and compare the fees charged by different banks and choose the one that suits their financial needs.