How banks make money on your credit card

Credit and debit cards look similar but influence differently on wealth utilisation. Credit cards issuing companies mastered a few main money making strategies:

  1. Interest rate applied on late payment
  2. Merchant interchange fees (mostly 2-5% of transaction value)
  3. Annual fees ($0 – $5000)
  4. Monthly fees
  5. ATM cash withdrawal (higher interest on default)
  6. Balance transfer
  7. Foreign transaction fees (mostly extra 3%)
  8. Over limit spending charges (if it permitted in settings)
  9. Partnership discount on promoted products or services
  10. Insurance
  11. Cash back partnership with merchants
  12. Extended warranty period
  13. Limited cash back per annum
  14. Policies for involuntary unemployment
  15. Sold debt to third party collection agency

Customers don’t read all agreement details and believe it’s going to benefit from card usage. Most of customers don’t benefit financially from any transaction. Customers spend money differently from debit and credit card. Credit card mostly preferred for online purchases which originally emotional based shopping. To measure trustworthiness of each customer credit score is checked. Lenders consider creditworthiness score before sanction of any credit card or loans.

For lenders crucially important is to attract new customers:

  1. Own more items for bigger happiness (in result person became debt slave of useless items)
  2. Greed and pride (be able to have more than other)
  3. Advertisements
  4. Sale season (get extra 5% cash back on only this card, get prolonged warranty, buy 2 get 1 free…)
  5. Points (spend more, accumulate more, use for more purchases)
  6. Miles (airlines trick with free upgrade, lounge access, free tickets, complimentary meals)
  7. Cash back (mostly limited by category or fixed amount per year)
  8. Stars endorsement (Paid star with fake smile advertise debt trap)
  9. Referral program
  10. Sales target for employees
  11. Partnership with retailers, airlines, hotels.

Conditions for average credit card enrolment mostly include:

  1. Enrollment bonus ( for example 50000 points granted after $4000 spend in 3 months)
  2. Annual fee (for company $0 annual fee not profitable, around $100 charge mostly applied with occasional waiver if all requirements met)
  3. Regular APR which stands for annual percentage rate and wary from 14-27%
  4. Cashback on particular purchases.
  5. Earn redeemable miles on airline and hotels booking
  6. Rewards for online shopping
  7. Foreign transactions fee
  8. Bill payment schedule

Above listed conditions applied on every person unless qualified for exclusive card. For example American Express Black Card issued by invitation only. Minimum $250000 spent per year, initiation fee $5000-$7500. Such exclusive card provide high rewards, premium status, concierge services and many more.

Sberbank Visa Gold Card currently most expensive to own. It’s debit and unlimited credit card in one. Initialization cost $100000 out of which $65000 is opening fee. Sberbank’s gift include IPhone and Montblanc card holder. Provided all possible bonuses including help in force major situation with coverage by bank $20000.

It’s possible to win from using credit cards but you have to know all terms and conditions.

In next article how companies make money on your debit card.

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