Annual fees and late fees, 4 ways credit card companies make money

India has seen significant growth in credit card usage, driven by strong consumer activity, indicating a broader trend of credit cards in the market. In response to this trend, credit card companies are launching various offers to expand their customer base. These offers include lifetime free credit cards, discounts, airport lounge access and other programs. The question, however, is how credit card companies recoup the money spent on these programs. Many credit card users fail to pay their credit card bills even before the due date, resulting in companies charging additional fees such as interest and penalties.

Additionally, credit card companies charge processing fees when customers opt for EMI plans, and also levy annual and renewal fees. Still, these companies often waive annual and renewal fees once customers reach certain spending thresholds each year. In addition, credit card companies generate revenue through balance transfers, late payments, cash advances, foreign transactions, and various other fees.

annual fee: Annual fees typically apply to cards with high rewards rates and cards designed for individuals with less than ideal credit. These fees help cover the cost of rewards and other benefits associated with the card.

Cash advance fees: When a customer uses a credit card to withdraw cash from an ATM, the credit card company charges a cash advance fee. These fees, which typically range from 2% to 5% of the amount withdrawn, are designed to discourage cash advances, which are riskier to the issuer.

Balance transfer fee: This fee is charged when a customer transfers debt from one credit card to another to obtain a lower interest rate. Balance transfer fees are typically 3% to 5% of the transfer amount, but some cards may waive this fee for a limited period or entirely.

Late payment fee: Customers who fail to pay at least the minimum amount due by the due date will be subject to late fees. While some cards may waive late fees the first time or entirely, late payments can have a negative impact on a customer’s credit score.

Credit card companies strategically use these fees to generate revenue while providing incentives and benefits to customers. However, customers must be aware of these fees and manage their credit card usage responsibly to avoid unnecessary charges.