Monday, March 16, 2009

How do banks make money through credit cards?

Credit cards are ubiquitous substitutes for cash. Ever wondered in how many different ways banks make money through credit cards issued by them?

1. Commission: When we use our credit card at a shop, the shop keeper gets paid by the bank who issued that credit card. But the bank reduces a certain percent (generally 2%) from the transaction amount before paying the money to the shopkeeper. That’s why some shopkeepers give discounts when you use cash instead of credit card for payment, especially on high value purchases such as gold.

2. Interest Charges: Interest charges are levied by the bank from its credit card owner for the revolving credit they maintain. This interest is one of the highest, and in India it can be up to 49%. According to the Reserve Bank of India, the outstanding credit on all the credit cards issued in India stands at Rs. 29,359 Crore at the end of December 2008. This amount, coupled with the high interest rate will give you an idea how much money the banks get from interest charges.

3. Fines & Penalties: Various fines such as late payment fee, check bounce penalty etc. are levied by the bank on its credit card customers. These amounts are also huge (more than 500 bucks).

Related Articles
- Credit card and effective interest rate
- How to best manage your credit card?
- Interest rate on credit cards to increase to 49%


Anonymous said...

To add on Bank also gives a n offer to the customer to convert the O/S balance into EMIs for which they may charge a processing fees plus a regular interest rate between 1 to 2 %.

In addition to that bank also gives a balance transfer option. To avail that option customer has to pay charges. Again an income for the bank

By : Prashant p

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Good post and likes it.This post helps me to know how banks go and earn money by usage of the credit cards.

Savings Account India said...

nice post. It shows, how bank charge money on the credit card. Now a days, credit card are too famous. We must have idea about bank charges, commission, penalties. Thanks for giving knowledge of this.

Anonymous said...

so instead of wasting a lot of money in paying off credit card debts, moral:we have to spend what we have already earned!

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Banks primarily earn interest income on the money they lend. Of the total interest income, credit cards account for less than 1% for most banks. When you opt for a 0% equated monthly instalment or EMI option, banks charge a nominal transaction fee. banking and finance courses

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