Synopsis: This article reveals the core revenue behind credit card companies, banks or financial institutions. The revenue is partly generated from unpaid loans, or interests and various fees.
Credit cards or any kind of financial tool play a very vital role in people’s day-to-day lives, but many people do not know how these financial institutions make money. This article breaks down the key revenue sources that keep the credit ecosystem running.
We as Indians are naturally alerted when it comes to money. Many people stated their opinions of credit cards being evil, but the use of credit cards will not harm your finances unless the bills are paid on time.
People go to the bank to withdraw money if they need it, but people also wonder where the bank gets their money from? Let’s look at the major financial sources of banks in India:
Fees
The credit card fees are charged by the bank in the form of joining and annual fees, late payment fee, cash advance fee and foreign transactions. Some of the fees like joining and annual fees are fixed rates by the bank, and the late payment fee, foreign transactions and other fees are levied from person-to-person depending on their expenditure manner of the user.
Fees of the credit card go up in terms of prices as the perks get better. Any person can choose from a wide range of credit cards that can suit their income or needs.
Interest Charges
Interest Charges are an important source of income to the banks. The costliest form of borrowing with interest charges are credit cards with average interest ranging between 30% p.a. and 45% p.a. in India.
Interest rates are checked before applying for a credit card. A few missed payments can lead the applicant into a debt trap which can also bring the CIBIL score down that can hamper the chances of loan approvals in the future.
Marketing tie-up charges
Credit Card companies come in collaboration with different brands for more revenue and customer loyalty which gives maximum benefit to the user such as discounts. These cards are known as co-branded cards.
The credit company launching their company with a brand can encourage the customers to use the services of the brand which can give them extra rewards and discounts.
Merchant fees
Merchant fees on business are the charges paid by a business every time a customer uses a credit card. The fees are compensated by processing the transaction, identifying the card, preventing any fraudulent transactions and maintaining secure payment networks.
The fee is split between the issuing bank and the card company through which the transaction was completed.
Also Read: Credit Card vs Debit Card: The Key Differences Every Consumer Should Know
Frequently Asked Questions
How can cardholders minimize fees and interest payments?
There are various forms of fees to be paid as a cardholder. Although, there are certain ways the cardholder can avoid or minimize the interest charges. Here is a detailed step process:
- Set up monthly bill payment reminders via mails or messages so that the cardholder can avoid any late fee payment.
- Set up an autopay option on the fee charged. The autopay option can prevent the cardholder from missing any payments.
- Credit cards often charge an annual fee, and the prices vary depending on the perks and rewards the cardholder gets from transactions they do through thee credit cards. Some might be high, and some might be affordable.
- It is very important to check if the perks or the rewards outweigh the annual costs of the credit cards.
- Make sure the holder uses a credit card that does not charge foreign transaction fees.
What should you do if you are charged a fee?
The cardholders are often charged with due payments. It can either be irresponsible behaviour with the utilization of the credit card or a genuine mistake. People normally succumb to panic due to this issue, but this can be handled responsibly.
If there is a scenario where the user receives a due payment notice from the bank, do not hesitate to call your card issuer. They may be willing to waive off the due penalty but that also depends on how good of a customer the cardholder is.
This can either lead to a waive off or a penalty possibility, but the cardholder must ensure that the mistake never occurs again.
Written by Atin Kevin
