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How do credit card companies make profit by giving us credit for 40-50 days (India). I purchase something on my credit card and I pay it to the credit card company after some days. How are they going to make profit with this where I'm not paying any service charge to them?

I'm asking this for couple of reasons.

  1. I heard that credit card companies charge the merchant with some percentage of the bill amount. Is this true? If that is true then why cant we get that percentage directly from the merchant by paying cash. We can get this percentage by getting discount in bill. isn't it?

  2. If they get profit from late fees or interest charges if customer makes late payment or pays long after due date. If this is the way they get profit, is this big amount compared to what they offer in credit to the customer?

Please put some points from your side to make me aware of this system, so that I can get maximum from a credit card company.

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6 Answers 6

up vote 27 down vote accepted

Their income is from the two sources you mentioned - they charge the merchants for each use, and they make interest money on people who carry a balance.

This is one reason a lot of merchants will be willing to give you a discount if you pay cash - they don't have to give a portion to VISA or MasterCard.

I wouldn't be able to speak to the relative proportions between the two income sources, but when many cards are at 30% interest for balances carried, and many people have tens of thousands of dollars owed on their cards, the interest income is not insignificant. They'll also charge interest immediately on cash advances.

A few cards also make money off of annual fees, although I'd suspect this is not very much in the full scheme of things.

The way to get the most out of a card, is to always pay it off fully at the end of each month.

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  1. You are correct. Credit card companies charge the merchant for every transaction. But the merchant isn't necessarily going to give you discount for paying in cash. The idea is that by providing more payment options, they increase sales, covering the cost of the transaction fee. That said, some merchants require a minimum purchase for using a credit card, though this may be against the policies of some issuers in the U.S. (I have no idea about India.)

  2. Also correct. They hope that you'll carry a balance so that they can charge you interest on it. Some credit cards are setup to charge as many fees as they possibly can. These are typically those low limit cards that are marketed as "good" ways to build up your credit. Most are basically scams, in the fact that the fees are outrageous.

Update regarding minimum purchases:

Apparently, Visa is allowing minimum purchase requirements in the U.S. of $10 or less. However, it seems that MasterCard still does not allow them, for the most part. Moral of the story: research the credit card issuers' policies.

A further update regarding minimum purchases:

In the US, merchants will be allowed to require a minimum purchase of up to $10 for credit card transactions. (I am guessing that prompted the Visa rule change mentioned above.)

More detail can be found here in this answer, along with a link to the text of the bill itself.

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Some large merchants do not give discount on cash as it does not work out any cheaper for them Vs Credit Card. In Credit Card typically fees given to all the 3 parties (Merchant bank, Issuer Bank and Visa) would be around 3%.

If cash payment is made, and the amounts are large, say at wallmart / K-Mart ... they have to deposit such cash at Banks, Have a provision to Storing Cash at Stores, People to count the cash. So essentially they will have to pay for

  1. Cash Officer to count,

  2. Bigger Safe to store,

  3. Transport & Security & Insurance to take Cash to Bank

  4. Plus Banks charge around 1% charge for counting the large cash being deposited.

  5. This cash would be in local branch where as the operations are centralized and Wallmart/K-Mart would need the money in central account, it takes time to get it transffered to a central account, there is a fee charged by Bank to do this automatically.

On the other hand, smaller merchants would like cash as they are operated stand alone and most of their purchases are also cash. Hence they would tend to give a discount for cash payment if any.

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  1. Yes, merchants are charged. Visa/Mastercards charge 1 to 2%, of which some part goes to the Visa/MC and the rest to the issuing bank (if you have an HDFC Bank Visa card, HDFC bank is the issuing bank. And yes, you can get a discount from the merchant - while it probably isn't allowed by Visa/MC, some merchants still provide discounts for cash. But you won't get it at places like supermarkets or large brand retail.

  2. Late fees + charges can be huge. In multiple ways - first, they all seem to charge a late fee of Rs. 300-500 nowadays, plus service tax of 10%. Then, you will pay interest from the bill date to the eventual payment date. And further, any new purchases you make will attract interest from the day they are made (no "interest-free" period).

Interest rates in India on CCs are over 3% a month, so you really must get rid of any open balances.

I've written a longish piece on this at http://in.finance.yahoo.com/news/The-good-bad-ugly-credit-yahoofinancein-2903990423.html

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There are 2 parties when we say credit card companies: The bank that gives you a card & VISA/Mastercard

For a Bank the revenues generally come from:

  1. Fees from merchants for POS terminals which many people have explained is in the range of 1-2% of the purchase.
  2. Annual fees(if any) charged on the card
  3. Late payment fees & interest charges in case someone is not able to pay on time or chooses to pay the Minimum amount due.

For VISA/Mastercard the revenue is from:

  1. Service revenues from banks for their participation in card programs
  2. Data processing revenues from banks for authorization, clearing, settlement, and transaction processing services
  3. International revenues from transactions where the cardholder issuer country is different from the merchant’s country

P.S. Have not covered American express here but in short it is a combination of the above 2 models

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Its not just late fees. The fees for going over your credit limit are exorbitant. To make things worse, they will rearrange the transactions you make during a day so that they can charge you more by making more of them fail.

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