Credit cards are a popular payment option, especially among younger generations who use them for everything from shopping to online booking. But while credit cards offer convenience, they also carry the risk of debt. Many people receive regular calls from banks offering new credit cards, and this isn’t a coincidence. Banks actively push credit cards because they make significant profits through various charges. Let’s explore how banks generate income through credit cards and the hidden costs that users often overlook.
Interest on Credit Cards: A Major Source of Income
One of the most significant ways banks earn from credit cards is through interest. Typically, banks offer an interest-free period of 45 days for purchases. However, if users fail to pay off the full balance within this time, they can be hit with hefty interest rates, ranging from 30% to 48% annually. Many cardholders struggle to pay their bills in full, leading to high-interest charges on the outstanding balance. Additionally, when customers choose to convert large purchases into EMIs (Equated Monthly Installments), banks often charge interest on these installments, further boosting their revenue.
Merchant Fees: A Cost Passed to Sellers
Whenever you swipe your credit card, the bank earns a fee from the merchant where you made your purchase. This fee, known as the merchant discount rate (MDR), typically ranges from 2% to 3% of the transaction value. It is shared between the bank and the payment processing network (such as Visa or MasterCard). While this fee is charged to the merchant, it’s often passed on indirectly to consumers through higher prices on goods and services.
Marketing Tie-Up Fees: Profits from Co-Branded Cards
Another lucrative revenue stream for banks comes from co-branded credit cards, which are offered in partnership with retailers, airlines, or other service providers. These cards often come with exclusive perks, such as discounts, reward points, or cashback offers. To issue such cards, banks charge marketing tie-up fees to the brands they partner with. The collaboration benefits both parties: banks earn extra income, while brands use the partnership to reach a wider audience by offering attractive deals to cardholders.
Additional Fees That Add Up
Besides interest and merchant fees, banks impose several other charges on credit card users. These fees may seem small but can quickly add up, contributing to significant revenue for banks.
- Cash Withdrawal Fee: When you withdraw cash using your credit card, banks charge a withdrawal fee, typically between 2.5% to 3% of the total amount withdrawn. This fee is separate from the high-interest rates charged on cash advances.
- Annual Fee: Many credit cards come with an annual fee, which users must pay each year for the privilege of holding the card. This fee varies depending on the type of card and the benefits offered.
- Balance Transfer Fee: If you move your outstanding debt from one credit card to another, the bank charges a balance transfer fee, usually around 3% to 5% of the transferred amount.
- Foreign Transaction Fee: If you make purchases in foreign currencies, banks charge a foreign transaction fee ranging from 1% to 3% of the transaction value.
- Late Payment Fee: If you miss the payment deadline or fail to pay the minimum due amount, you’ll face a late fee, which can range from 14% to 40%. While banks often offer concessions on this fee, it remains a major source of income.
Credit cards offer convenience, but it’s essential to be aware of the costs involved. Understanding how banks profit from credit card usage can help you manage your finances better and avoid falling into the trap of debt.
