How do banks earn with credit cards?

Different people have different perceptions of credit cards. For some, it’s convenient because you don’t have to carry cash. For others, it’s a quick and easy way to spend money. Simply swipe the card to buy anything, anytime, anywhere. Almost all banks offer various types of credit cards to meet financial needs.

You can use your credit card to buy groceries, book a movie ticket, buy home appliances, shop online, pay for mobile phone bills, clothes and accessories, and more. All companies that offer goods or services accept them as a form of payment.

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

1. Merchant fees

The retailer does not receive the full amount when you make a online credit card Payment. Banks may charge merchants an interchange fee, a small percentage of their purchase amount.

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

2. Credit card charges

Many banks allow you to request a free credit card, but they may charge annual fees, balance transfer fees, cash advance (withdrawal) fees, foreign transaction fees, late payment fees, and more. Some of these fees, such as the annual fee, are charged whether or not the card is used. Here, IDFC FIRST Bank may be the right choice for you different types of cards no annual fee.

3. Financial charges and interest

For banks, interest generates good income. It can come from people not paying their bills on time. Additionally, credit cards in India charge interest rates between 22% and 49% per annum, making it one of the most expensive forms of borrowing.

Also, it is important to remember that not all banks can sanction a credit card loan. Big banks like IDFC FIRST Bank can get you an easy loan on your credit card. With a 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 revenue from credit cards comes from both cardholders and merchants. For cardholders, the profit comes mainly from interest charges. However, banks may also earn transaction, annual, and penalty fees. There’s 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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