Have you ever wondered how a credit card company makes money?

Credit card companies offer funds to help you purchase commodities that you might not be able to buy using your income alone. A credit card can help you buy many goods and services – such as a phone, clothes, furniture, air tickets, train tickets, etc. – with ease, and without having to worry about paying for it immediately. They also offer additional benefits such as air miles, cashback options, discounts, rewards, and more, depending on the provider. 

However, while credit cards offer you the financial backing to fulfil your dreams, have you ever wondered how credit card companies earn money themselves? This article talks about the various methods by which a credit card company can turn a profit. 

1. Joining and annual fees: When you buy a credit card, the company charges you a joining fee. This is a one-time fee that is paid at the time of purchase. Post this, you will be charged a renewal fee every year. These charges can vary for each company and depends on the kind of card or features you opt for. 
2. Interest rates: The money that a credit card company lends you is given to you on interest. In credit cards, it is charged as an Annual Percentage rate (APR) that is charged on a yearly basis, payable if you have any outstanding amount. However, in most cases, you can avoid paying this amount if you have paid your credit card dues in full. 

Related: How is credit card interest calculated? 

3. Late payment charges: In case you miss the due date for clearing your credit card bill, the bank will charge you a late payment fee. This could vary depending on the institution and the amount due. Sometimes, it may waive charges for regular customers or for an amount that is considerably low. 
4. Foreign currency mark-up charges: This fee is charged whenever you use your credit card to make a transaction with a foreign currency, or if your transaction passes through a foreign bank. The percentage charged on each transaction can range between 2.5% and 3%. This also depends on other factors, such as the currency exchange rate on the day of the transaction. 
5. Cash withdrawal charges: If your credit card permits you to withdraw cash at an ATM, you can do so at an additional cost. Usually, credit card companies charge anywhere between 2.5% and 3% on the amount withdrawn

Related: What are contactless credit cards and how do they work?

6. Over-limit usage fee: This fee is charged when you cross the limit set up in your credit card. Every card has a limit up to which you can spend. For instance, if your card offers a limit of Rs 1,00,000, you will be charged for every rupee spent over and above this amount. 
7. Statement request fee: Although your credit card statement can be obtained online or on the bank’s netbanking app, some people prefer to receive physical bills. Credit companies may charge extra for posting a printed bill to your address. In addition to this, if you request a duplicate bill, the company may charge you for the costs incurred for sending you a second hard copy.
8. Transaction charges: This is charged on the transactions made on your card. They include fuel bills, electricity bill payment, or any payment made above or below a certain threshold. The charges from each transaction are an income for the company offering the card. 
9. Balance transfer fee: Transferring the balance of one card to another might attract extra fees. This could depend on the type of card, the balance amount transferred, and the company’s process and policy. 
10. Card reissue fee: If you damage or lose your credit card and need a new one, you will be charged a fee to issue a new card. 
11. Merchant fee: This refers to the fee that the bank issuing the credit card charges every time you use your credit card. This could either be a percentage of the sale or a flat rate.   

Related: 5 Things to do immediately if you lose your credit card

Fees and rates to be aware of when signing up for a credit card

While credit cards offer us a lot of ease, they can also be an expensive financial product. Not many people know of the various hidden costs that credit card companies charge for transactions. It helps to be aware of all these fees before you buy a card. Though credit card companies do charge fees on certain occasions as mentioned above, it’s important to note that the benefits if having one still outweighs everything else.

To ensure you are not paying more than you need to, compare different credit cards and take a look at factors such as the joining fee, reissue fee, over-limit charges, annual fees, etc. Evaluate the features offered by each card and see how much money you are likely to spend on the card in a year. If the fees seem high, check for discounts or cashback that the company provides on select brands and transactions. See if you these are of use to you. 

Each credit card can be used for a specific purpose – apparel shopping, grocery shopping, etc. So, pick a card that is tailor-made for your needs. 

Related: Things to consider before picking up a credit card 

Credit cards have many uses and have become a necessity today. Given the rising dependency on these cards, the offers and benefits offered by companies are also improving. While credit card companies enforce certain charges to earn a margin on each card, you must be aware of these caveats as a customer.