How do banks make money through credit cards?

Credit cards are ubiquitous substitutes for cash. Ever wondered in how many different ways banks make money through credit cards issued by them?

1. Commission: When we use our credit card at a shop, the shop keeper gets paid by the bank who issued that credit card. But the bank reduces a certain percent (generally 2%) from the transaction amount before paying the money to the shopkeeper. That’s why some shopkeepers give discounts when you use cash instead of credit card for payment, especially on high value purchases such as gold.

2. Interest Charges: Interest charges are levied by the bank from its credit card owner for the revolving credit they maintain. This interest is one of the highest, and in India it can be up to 49%. According to the Reserve Bank of India, the outstanding credit on all the credit cards issued in India stands at Rs. 29,359 Crore at the end of December 2008. This amount, coupled with the high interest rate will give you an idea how much money the banks get from interest charges.

3. Fines & Penalties: Various fines such as late payment fee, check bounce penalty etc. are levied by the bank on its credit card customers. These amounts are also huge (more than 500 bucks).

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