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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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I've found in India, merchants charge an additional 2% when you buy on card in order to cover the payment they make. I believe in other countries (like America) the merchant is not allowed to charge extra for card payments, but in India they can and they do. –  statictype Aug 12 '10 at 1:33
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Even in India it is not legal to charge that extra amount to customer. If customer complains about that extra charge, then merchant will face the action. –  JayaprakashReddy Aug 12 '10 at 7:06
    
MRP rules apply but no one follows... :( –  Faiz Aug 12 '10 at 8:46
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I think you answered your own question. BTW: Those fees to merchants can be pretty high. I've heard Amex merchant fees can be as much as 8%, which is probably why no one takes them. –  JohnFx Aug 12 '10 at 15:45
    
@JayaprakashReddy I think it doesn't make any difference if the customer complaints merchant will continue to charge that 2% & will never face action as well. It's India!! :) –  Pratik Oct 18 '12 at 15:01

5 Answers 5

up vote 25 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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I believe many merchant agreements prohibit stores from charging different prices for cash or credit, which is why you don't often see that. –  Eric Petroelje Aug 12 '10 at 0:16
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@Eric: I think stores are prohibited by their merchant agreements from adding a "surcharge" for credit transactions. I've seen some (computer stores, notably) work around this by offering a "cash discount". i.e. the regular price has the surcharge built-in. –  Chris W. Rea Aug 12 '10 at 0:20
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A few cards also make money off of annual fees This was reduced for a while, likely due to competition. However, that's creeping back into the market. –  George Marian Aug 12 '10 at 0:33
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Note that the elevated interest rates on credit cards are somewhat offset by the elevated risk of default. You could charge a trillion percent interest and still lose money if no one ever paid you back... –  fennec Aug 12 '10 at 17:43
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@Eric: money.stackexchange.com/questions/3196/… says merchants can now announce a discount for cash. –  dfrankow Dec 25 '10 at 19:29
  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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No it is not illegal in India :( –  Faiz Aug 12 '10 at 8:44
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Do you have a source for minimum credit purchases being illegal in the U.S.? I find it quite common, especially at dollar stores. –  Stephen Cleary Aug 12 '10 at 14:15
    
@stephen Thanks for pointing that out. In my haste, I forgot to check whether that was a matter of law or just policy. –  George Marian Aug 12 '10 at 17:32
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Soon, every network will have to allow minimum purchases. money.stackexchange.com/questions/3196/… –  graywh Sep 27 '10 at 15:30
    
@gray Thanks for the reminder. I've updated the answer to reflect that and link to the answer as well. –  George Marian Sep 27 '10 at 15:39

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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Interesting. I didn't know that banks would charge percentages instead of fixed fees for large companies. –  MrChrister Sep 27 '10 at 17:10
    
Large merchants also get volume discounts on transaction fees from credit card companies. Not a verifiable source, but I once met a Home Depot operations employee who told me Walmart paid something like 0.2% –  Jayraj Oct 3 '12 at 16:45
  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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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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