How do credit card companies earn profits by lending without interest?
If your CIBIL score is good, then you definitely get at least one call a week, in which you are requested to take a credit card, and if you already have a credit card, then you’ll be motivated to take another one.
So let’s know what is a credit card and how does it work and how do you get the benefits without any charges?
Table of Contents
What is a credit card?
A credit card is a plastic card issued to users of a specific payment system. Through this card, the holder can buy goods and services with the promise that later he will pay the price of these goods and services. The issuer of the card gives a limit of credit to the consumer through the card, under which a user can receive money and also withdraw cash to pay for the purchased goods. When you make a purchase, even after there is no balance in your card, the credit card company makes a payment for you, which is lent to you, which you have to pay on the due date.
Although credit card has many benefits, but if caution is not given, it can also prove to be a headache. You would think that credit card companies give rewards on purchases, even though they lend for almost a month without any charge and still the rewards!
How do credit card companies make a profit?
Profit Sharing – These credit card companies have tie-ups with many producing companies, so that they divide themselves among the profits made on purchases. So often they also motivate you to buy from that particular market and sometimes give rewards.
Late Fee Interest – The biggest weapon for credit card companies to make profit is Late Fee! Yes, late fees have become the biggest source of their earnings. Late Fee is the interest that you do not pay the credit card dues on the date of payment, then the amount you are charged in addition to the actual bill of your credit card at the same time. In order to make extra recovery of this late fee, they also suggest the option of minimum bill payment so that the remaining bills can be charged later at a higher rate of interest.
EMI Interest – You can convert purchases or expenses made with a credit card to EMI, this facility is also provided by the credit card company. When you convert any expense into EMI, during that time you are charged a fee, along with every month’s EMI, you pay a hefty amount in the form of interest.
Conclusion
Basically, credit card companies charge a fee in exchange for providing additional facilities to consumers and if used with caution, it can also be profitable.
Credit card companies make the bulk of their money from three things: interest, fees charged to cardholders, and transaction fees paid by businesses. Credit card companies make money by charging high-interest rates on credit and issuing late fees for balances.
