How Do Banks Earn Money From Credit Cards | FinanceElements

When we use our credit cards we ignore the various possibilities of the origin of this plastic money and how banks lend us the money lend to them. Do they do it for free or is there a cost involved? This factor is always over looked.

Credit card means free credit and free credit means invisible money flowing through transactions.

But this notion of free credit is perceived in a wrong way. There is no invisible money and there is no free credit. Banks and companies do charge various fees which consumers are sometimes not even aware of and that is how banks earn their profits.

So how does it all work?

Commission from vendors:

Credit Card Companies usually charge a cut of about 1%- 5% from its vendors. For example, you have an American express card which you use for booking an airline ticket (American airlines) which costs about $1000. Now American express will take a cut of about 3% that is $970 to American airlines and the remaining $30 for the credit card company. Thus numerous tie ups with vendors help banks/ credit card companies to make chunks of profit.

Penalty costs:

Any late payments by the credit card holders help the banks to earn money. They charge anywhere up to $25-$35 as penalty costs for late payments after offering a buffer extension period.

Interest levied on revolving payment

The outstanding credit card payment which you roll on for the next month is charged at an interest cost which is usually from 2.79% to 3.9%. Thus each month if you wish to pay up your balance payment in the next month, a charge has to be paid.

Advertisements

Many banks, as a part of their marketing exercises take up advertising as a source of some profit. Various ads are featured in your monthly credit card statement, marketing their product and benefits. All this is also done at a premium price. Due to stringent regulation giving out public information to these companies has been debarred.

Fees and other charges

  • Some credit Card Company’s charge
  • Annual fees which range in about $25 to $300 per year which can be negotiated and waved off if a good balance exists.
  • Application fee of $10-$50 per application
  • Advance cash fee of 2-4% on every cash transfer
  • Over the limit fee for balance above your credit limit and Return Check fee which is charged if your check bounces, both of up to $35

In conclusion one must understand that none of the services offered in the market are for free and they directly or indirectly have their own way of earning money from their customers.

Article Written by – Sanika Janwalikar, sanikual@gmail.com

Picture Courtesy - 401(K) 2012

 

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