Updated on: 17 Jan 2020.
Have you ever wondered why you receive so many calls requesting you to apply for a credit card? Well, the credit card industry is huge and ever-growing.
Credit card companies issue lakhs of credit cards to the customers and rely on the lack of self-control and absence of mind on part of customers to make money a big way.
Let’s have a close look.
How Do Credit Card Companies Make Money
#1. Interest Rate
A large portion of revenue for the credit card companies is through the interest paid on the balance outstanding amount from month to month.
This interest can vary between 3% to 3.5% monthly depending on the bank and it can round up to 36% to 42% annually which is the highest rate of interest you will ever pay for any credit facility.
Now you have come to know why banks are so willing to offer you a credit card when you open a bank account. Most people fail to understand the seriousness of interest rate charges.
To avoid paying such high-interest charges, just pay your balance amount for due date in full and you won’t have to pay any interest.
#2. Joining & Annual Fees
Most companies have joining fees. Some banks waive it off and some don’t. Annual fees are for the services provided by the bank to maintain the account.
It’s paid yearly. Some banks waive off these charges if you spend a certain amount in that year as mentioned in terms & conditions.
Typically, the annual fee is in the range of 500 – 2,500. It could vary for premium credit cards depending on the bank.
#3. Late Payment Fees
Every time a customer misses a payment, late payment fees will be charged depending on the outstanding amount.
The bigger the amount, the higher the fee. For example, a fee of 300 for a bill balances up to 10000.
A fee of 600 for bill balance from 10000 – 25000 and so on.
#4. Cash Advance Fee
For every credit card, there is a cash limit which is usually 40% of the total credit limit issued by the bank.
If you wish to withdraw cash from your credit card, the banks usually charge 2.5% as the fee.
Let’s say, I have 1 lakh as my credit limit. So, 40% of that is 40000 which is my cash limit. If I choose to withdraw this amount at any ATM, I will be charged 2.5% which is 1000 as a cash advance fee.
The customer must also keep in mind the interest rate charges from the date of withdrawal and ensure to pay before the due date.
#5. Over Limit Fee
If you cross your assigned credit limit, banks will charge you a minimum over-limit fee of 500 or 2.5% of the over the limit amount or whichever is higher.
Some banks decline your transaction if it is beyond your credit limit. If not, then you have to keep in mind the over-limit fee charges.
#6. A Foreign Currency Transaction Fee
Banks will ideally charge you a transaction fee of 3.5% for every overseas transaction you make.
This is then converted into INR as per the exchange rate on that day and added to your bill.
#7. Transaction Charges
Banks usually have tie-ups with a lot of sellers and merchants who accept credit cards.
Every time you use a credit card at their location, a small percentage ( usually 2-3%) goes to the bank. Banks earn money when you do transactions on fuel, groceries or online shopping.
For example, if you use your credit card to buy groceries at a supermarket and pay 1000 rupees.
A small transaction fee of 2% means that the bank will get 20 rupees and the supermarket owner will get Rs. 980.
#8. Card Reissuance Fee
Banks will also charge you for reissue of lost, stolen or damaged card. The price for this will vary between 100-500 rupees.
#9. Statement Request
Usually, the monthly statement is mailed out on your email id provided.
But for some reason, if you request a duplicate statement, your bank will definitely charge you for that.
These charges will be between 100-300 rupees depending on the bank.
#10. Balance Transfer
This is when you move a credit card balance from one card to another.
It’s like paying off one credit card balance with another credit card.
Banks provide this facility at a certain fee depending on the amount to be transferred.
Always ensure to check with your bank on the balance transfer fee before going ahead otherwise you may end up paying a high fee.
Apart from the above, you will also pay 18% GST as notified by the government of India. This is applicable on all fees, interest and other charges.
Kindly go through the terms and conditions provided by the bank to see all of the above fees and charges mentioned.
As you can see, a credit card comes with its share of additional charges which the bank representative does not completely disclose to its customers.
It is important for us to be aware of all fees and charges so that you can avail full benefits of credit cards rather than making the banks richer.