Many people ask questions like, How credit card companies make huge profits despite lending money, how they are growing by giving money to the customers if someone pays on time and how the company survive, but there are multiple other sources from where credit card companies extract money from the consumers three major aspects these are:
Interest charged
The major source of money for credit card companies is the interest charged on the transactions made by customers, few companies charge specific amounts of interest on the transactions made, they only charge when the customer won’t be able to pay on time.
Interest on EMIs: Recently I made a purchase of an iPhone with my ICICI Credit card, i was charged Rs 426+ every month as an interest fee on my 6600 EMI and that is perfect for me if I want to get liberty on Equated Monthly Installment rather than paying heavy amount of 60 to 70,000 Rs, as India is the growing market and the credit culture is very common here so companies provide good credit limit to their trusted customer.
How to avoid interest rates on credit card transactions?
Credit card companies earn most of their income from the interest charges to the customers, you might be aware that credit card is kind of a new trend in India and in the US this is the common practice, In India consumers are getting more engaged in credit card transactions as this seems an easy way to fulfil the needs but the easy availability of the loan leads to arise buying capability of the customer, people think that they can buy unnecessary things in easy instalments but this loop is making credit card companies earn a lot, you can avoid credit card interest by following these steps:
- Always prefer no-cost EMIs as many banks and online vendors provide no-cost EMI interest charges by bank but the same amount goes levied off by the vendor as a discount.
- Usually, banks charge more interest on late payments and this can go up to 36% PA, to avoid payments on time is advised.
- Make transactions only when you think this is important to be made or make your purchases within your limit, ideally, you can spend 25% of your salary on buying products
- Avoid making small transactions as you might think these are small transactions but at the end of the month, you will get a heavy bill to be paid.
Credit card fee
The credit card fee covers the major portion, as the credit card issuer charges multiple fees to the consumers which even customers won’t hesitate to pay because of the services provided by the credit card issuer, these are the types of fees that credit card companies can charge and you should be aware of that:
- Annual Fee: The common fee which everyone might know that credit card issuers charge is the annual fee paid by the consumer for the card services, this is the fixed amount charged by the bank yearly from the customer, and this can vary from $5 to $1000 depends upon company to company and the type of the card.
- Cash advance fee: Credit card allows customers to withdraw cash directly from the ATM and a specific percentage of interest is charged per ATM transaction this can vary from 2% to 15% depending upon issuer to issuer, sometimes people are badly need of cash and they don’t have liquid money available with them so they have the option to withdraw the cash at a certain percentage of interest.
- Balance transfer fee: Sometimes people use multiple credit cards or borrow money from someone to pay so they simply transfer money from one card to another in exchange for a certain percentage of interest rate, this allows customers to get money when needed and profit to credit card issuer.
- Late fee: People use credit cards when they are out of money and sometimes they won’t be able to pay on time then the card issuer a heavy amount of interest on the late payment this way they earn a lot.
- Assessment fee: Credit card networks like Visa, Rupay, and Mastercard charge a specific percentage to merchants which is usually around .10% to .20% on every transaction made through them and through this they earn money.
- Foreign Transaction fee: People who travel abroad and use their credit card outside the country to buy things or withdraw cash, credit card companies allow them to do so but with a certain percentage of interest rate and through this they earn a lot of money as the travel culture is multiplying.
Interchange fee
Not only customers are charged for credit card transactions, but merchants who accept credit card transactions also have to pay a certain percentage of the transaction to the card issuer as the merchant gets the full amount in advance from the card issuer, in this issuer bank or partner earns from both slides from the consumer and merchant as well.
Assessment fee
Not only do card issuer charges merchants the card networks companies like Visa, Mastercard, and Rupay charge a small percentage as a transaction fee to make a transaction through their secured network to make transactions encrypted and safe so that they can reach the end customer, this fee insures the safety and security of every transaction routed on their networks.
Types of credit card companies
In Majorty only two types of credit card companies are ruling the world and these companies made the credit card network strong in the work.
Credit card issuer companies
Credit card issuer companies are the group of banks and financial institutions that issue cards to the consumer mostly these are the public and private banks and these companies lend money to customers by evaluating their spending habits, the role of these companies is to issue the credit card and lend a specific amount to the customer to make them use the money on credit.
Credit card network companies
Credit card networks are the companies that provide the transaction services or, these companies are the controllers of the transaction as they oversee the transaction and provide a safe virtual network to make the transaction smooth and secure through their networks, these companies are, Mastercard, Visa, and American Express.
Now, only some companies are the network and issuer For Eg: American Express is both a credit card issuer and a network as well, who provide a safe and secure network to make transactions smooth and hassle-free.
Both these companies charge a specific amount of the money as a transaction fee to earn profit out of the transaction, these both companies have an equivalent role in making a credit card network smooth and ongoing.
How to avoid credit card fees?
Credit card companies always wish that their customer to make more and more transactions on the credit cards so that they can earn more, to boost that they provide specialised offers to the customers to influence them to buy more but people should have to be aware that this will ultimately affect your pocket, to avoid credit card fee avoid doing unnecessary transactions and don’t get easily influenced by the offers issue by the card issuers.
You can follow a few below-mentioned precautions to avoid extra credit card fees or interest:
- Try to pay your full balance in the same month or the last date of the payment, as credit card companies charge compound interest sometimes so this will lead to heavy penalties on your pending amount.
- Don’t get the credit card upgrades so frequently as they come with a higher annual or maintenance fee which will lead to an extra burden on your pocket.
- Do not overpay every month, the best practice is to spend only 50% of your credit card limit if you are buying extra.
- Don’t get influenced by the advertisements or the upgrade benefits until you need those, Advertisements just raise a need to get better service but ultimately you don’t need those.
- Avoid the fees unnecessary charged by banks on a few products they charge heavy processing fees, you can postpone that purchase if you can or you can find an alternate source to buy the same otherwise you will end up paying the heavy fee on the transaction and the interest for the same may also be on the higher side.
The amounts may seem very low in percentage but credit card companies manage to do millions of transactions in a day so they earn huge profits from this process at the end Customers have to pay, so the best part is to avoid unnecessary transactions and keep your money safe.
Do credit card companies make money on the full payments made by consumers?
Yes, credit card companies earn money even if the customer makes full payment on time but this time they earn from the merchant because a fixed amount is charged from the merchant as well for providing the services, as the merchant is getting two benefits from the transaction the first one is the merchant is getting sale with the help of the credit card company because even that customer can buy the products who won’t be able to do in one go,
on the other side merchant is getting a full amount in their bank account even if the transaction was made on credit, card issuer company is paying the full amount to the merchant after deducting the percentage of the transaction fee.
