How Do Banks Earn Profit from Credit Cards

There are two ways for Banks to Earn Profit from Credit Cards,

  1. Banks charge interest to the credit cardholder if they fail to settle the outstanding balance before the due date.
  2. Banks charge fees from the credit card holder for the card service that is offering.

Banks provide credit cards for their customers. Customers can use their credit cards for cash withdrawal, in-store purchases using pos devices, online payments, fund transfers, bill payments, atm cash withdrawals, etc.

Bank allows credit card customers to do purchases using the credit card offered to them. Bank (credit card provider) settle the amount with the Merchant within few days.

The cardholder has the liability to pay back the amount to the bank before the due date. The bank charges interest to the cardholder if they fail to settle the outstanding balance before the due date. This is one method for the banks to earn profit.

Banks charge fees from the credit card holder for the card service that is offering. This is another method for the banks to earn profit.

Examples of credit card fees are,

Credit Card Fee NameCredit Card Fee Description
Annual Credit Card FeeBanks charge the annual fee for the credit card service offered to the customer
Finance Charge (Credit Card Interest Rate)Banks charge interest rate if the credit card balance is carried forward beyond the grace period
Late Payment FeeBanks charge a late payment fee if the credit card balance is not settled by the grace period
Balance Transfer FeeBanks charge a balance transfer fee if a credit card balance is transferred to another credit card
Card Issuance FeesBank charge fees when a debit or credit card is issued to the customer
Card Replacement FeesBank charge fee to reissue a card if the customer lost their credit or debit card
Cash Advance FeeBank charge cash advance fee if a customer uses the credit card to withdraw cash
Various types of credit card fees charged by Banks

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