Credit Card: Don't get caught up in the free credit card scam this festive season. Learn how companies make big profits by offering free cards..

Many of you probably have a credit card, and those who don't must be thinking about getting one as soon as possible. Every day, you receive calls from banks, where agents tell you that the card is free, there's no annual fee, and you'll earn reward points on every spend. "Free cards, rewards, and cashback" sounds great, but the real question is, how do banks fill their pockets when they're offering everything for free?

In reality, credit cards are a business model in which the customer thinks they're benefiting, while the real revenue goes to the banks and card companies. So let's explore how banks' earnings are hidden in every swipe, every delay, and every transaction.

Interest is the biggest source of income.

Credit card companies' biggest source of income is interest. Users who don't pay their full bills on time are charged hefty interest. This interest typically ranges from 30% to 50% annually. This means that if you don't pay a ₹10,000 bill, the amount could reach ₹15,000 in a few months.

Many customers purchase goods on EMI, which also generates revenue for the bank. The interest on EMIs is typically between 10% and 20%. This means that while "no-cost EMI" is just a name, banks actually earn something from every transaction.

Heavy charges apply for cash withdrawals.
Many people withdraw cash using credit cards (cash advances), which proves to be the most expensive transaction. This not only incurs interest, but also incurs a 2-3% charge. Thousands of people withdraw money using credit cards. Imagine, even if the average interest charged is 30%, this could be a significant source of revenue for the bank.

Credit card companies also earn from loans.
Credit card companies aren't limited to providing cards. They also offer personal loans to customers, based on their card limit. Interest rates on these loans range from 12% to 24%. Banks often lure cardholders with EMI conversions or instant loans. This means the more you use your card, the more the bank earns.

Interchange income also generates significant revenue.
Whenever a customer purchases with a credit card, the merchant is charged a fee called the MDR (Merchant Discount Rate). This fee typically ranges from 1% to 3%. The card-issuing bank receives the largest portion of this fee. This means that for every swipe, the bank pockets a portion of the commission from the merchant.

Membership and Annual Fees Also a Source of Revenue
Although many banks claim "no annual fees," most cards do have a membership fee or annual charge. This fee can range from ₹500 to ₹10,000, depending on the card type.

Many banks start charging these fees after a few years, or say that if you spend ₹1 lakh annually, the fee will be waived. This means that you either increase your spending or pay the fee—in either case, the bank profits.

Joining Fees and Hidden Charges
Banks also charge joining fees on some premium cards, ranging from ₹1,000 to ₹5,000. Often, these fees are refunded in the form of reward points or gift vouchers, giving the customer the impression that everything is free. This is essentially a business strategy. Initially, the lure of a "free" offer is used to attract customers, and later, the charges are recovered.

Other charges also generate revenue.
Credit card companies earn millions not just from interest and fees, but also from small charges, such as:

Late Payment Fee - If you don't make a payment by the due date.

Balance Transfer Fee - When you transfer a balance from one card to another.

Cash Advance Fee - A fee charged when withdrawing cash from a card.

Foreign Transaction Fee - A charge levied when using a card abroad.

Over-limit Fee - If you spend more than your card limit.

These charges result in crores of rupees being collected each year in penalties alone.

Why is this business always profitable?
The model of credit card companies is designed in such a way that their chances of loss are almost negligible.

They earn interest from customers.
They earn interchange income on every transaction.
They generate additional revenue from fees.
They engage customers with offers and rewards to increase spending.
This means it's a "win-win" system—short-term benefits for the customer and long-term profits for the bank.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.