How Credit Card Companies Are Making and Earning Money?

Do you know that credit cards are the most aggressively marketed products in the history of mankind? Thousands of dollars are spent on the marketing of these cards. So, if you think that these companies would not be making any money or if you think that you can use these cards for free; you need to rethink.

Through this article, you will learn how credit card companies are making money. In this article, you will know more about:

1. What is a Credit Card?
2. Pros and Cons of Using Credit Cards
3. How Credit Card Companies Are Making Money?

What is a Credit Card?

In simple terms, a credit card is a digital form of borrowed cash. It is the money that you borrow from credit card companies to make purchases and pay off bills. Since it is not your money, you are bound to return it along with interest within a set time period. If you are unable to return this amount on time, you will be charged a late fee.

Related Read – What is Credit Default Swap (CDS)?

Why Do You Need A Credit Card?

A credit card is a payment card that enables you to make purchases and pay bills. You may use it when you are short of money or for immediate requirements. You can also use them for the perks credit card companies offer cardholders. With a credit card, you can do the following:

• Buy things that you are unable to afford
• Make payments without using money from your account
• Do online transactions in a secure way

Pros and Cons of Using Credit Cards

Credit cards have advantages as well as disadvantages. You will learn about it in this section. Let us first talk about the advantages of using credit cards:

Advantages of Credit Cards

The following advantages make credit cards a useful mode of payment:

• Immediate expenses: Credit cards can be used for making immediate payments. In case you do not have enough money, you can rely on credit cards to make that payment.
• Risk-free transactions: This is one of the biggest advantages of using credit cards. Banks will not hold you responsible if a fraudulent transaction occurs while making payments through a credit card. As per the RBI guidelines:

‘If you have suffered a loss due to unauthorised electronic transactions, your liability may be limited, but also zero, if you notify your bank immediately.’

Do note that the bank will revert the full amount of fraudulent transactions in 10 days if you report the fraud within three days of its occurrence. Refund rules differ for fraudulent transactions depending on the time when you report the theft.

• Get Rewards: Credit card companies offer a number of perks to you as a cardholder. You will enjoy cashback, insurance, discounts and reward points that you can redeem for purchases.

Check out credit card banking online courses

Disadvantages of Credit Cards

While there are many advantages, you should weigh the following disadvantages as well:

• High Late Fee: If you fail to make credit card repayment on time, banks charge a very high amount as the late fee. This fee can be so high that it might be double or triple the interest rate of other loans.
• Hidden Charges: These include charges that you might not even know about until you go through your credit card statement in detail. These may include annual charges and advance charges.
• Increase in prices: This is a direct impact of credit cards on all customers. Stores increase product prices to compensate for the charges that they pay to credit card companies. You will learn more about it in the next section where we will discuss how credit card companies make and earn money.

How Do Credit Card Companies Make Money?

Credit card companies are making money through the following methods including:

• Annual Charges
• Hidden Charges
• Late Fee
• Interchange Fee

Let us discuss these methods in detail:

1. Annual Charges

The first and the basic method is through annual charges that are levied on you for owning the card. This is added to your financial statement. Certain credit companies waive off charges depending on the offer on that card.

2. Hidden Charges

These are the different charges through which credit card companies make and earn money. These may include cash processing fees, reward redemption fees and cash advance fees. For example, you have to pay an additional amount whenever you make any credit card payment in cash. You also have to pay 2.5% extra charges in case you withdraw money from an ATM using a credit card.

3. Late Fee

Credit card companies make the most money through late charges. Banks charge a hefty amount if you fail to make payment on time. These charges are often quite high. Sometimes it amounts up to a 30% annual interest rate.

4. Interchange Fee

You might not even be aware of this term until now. It is one of the most tactical methods through which credit card companies make money. Credit card companies charge interchange fees as an additional amount on payments made in stores. Stores have to pay this additional amount to credit card companies whenever a credit card transaction takes place.

This fee is equal to a certain percentage of the total sale. Credit card companies use this fee to offer rewards to you. Since this amount goes from the pockets of store owners, they extract this money from you by increasing the prices of products. Whether you are a cardholder or not, you will still have to pay these high prices.

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Conclusion

Credit cards are a multi-billion dollar industry. No other product is marketed and sold at such a huge volume as credit cards. Credit card companies are making money out of your pockets which is way more than you can spend. 

It is important to note that you should not completely rely on credit cards for managing your expenses. There are many other methods of payment through which you can save and spend money. A good practice is to make timely payments and avoid the don’ts while using credit cards. Using a smarter approach, you can use credit cards for a long time without exhausting yourself.