2023-08-13 17:23:35
These are the main income sources for credit card companies.
You might be wondering – if credit card bills are paid on time, you will never have to pay interest.
You get all the benefits of a credit card without having to pay anything for it.
You are right. That’s exactly what everyone thinks.
But that isn’t what happens all the time.
Late payment and default
A good number of people are late. Credit cards in the US earned a total of $12 billion in 2020 from late payment fees in the USA.
And then of course, there are those people who never pay back. Those are called bad loans or non-performing assets (NPA).
The credit card company might take its defaulting customer to court to resolve the matter.
Or, they might sell this loan to a debt collection agency. The agency might then try to recover the money from the defaulter by taking them to court or using other methods.
Most of this makes sense so far.
But this still doesn’t explain why companies offer rewards; why they are willing to do outrageous things (like deliver ice cubes on a helicopter).
Rewards are actually easy to explain.
The credit card companies want you to spend more money. Remember, they earn money from merchants.
Every time you pay anywhere, they get some money from that. That’s a direct earning for them.
They don’t mind spending on rewards of different kinds because they will be able to make that money back through merchant fees.
Plus there’s also the fact that these rewards mean more people will want to own a credit card.
And that means more merchant fees, more late fees, and more interest earned.
That's about it – it really is just that.
The rewards are there to attract more people; to make everyone spend money using credit cards.
Yes, even the helicopter ice cube delivery makes sense – imagine the kind of money such cardholders must spend.
Problems with Credit Card
For people who lack discipline, the late fees and interest can add up fast.
Credit card debt is a serious problem in the USA – where credit cards are more common.
As you saw, credit card companies want more people to have credit cards.
To minimize their losses, for each person, they impose a credit limit – a limit beyond which you cannot spend using the credit card.
But different credit card companies want people to use their credit cards.
So they keep it easy to get a new credit card.
In the US, there are people who take one credit card, spend using that, and they are not able to pay back. So they take another credit card and spend using that.
Eventually, the money owed becomes huge.
Remember, money spent using a credit card is basically a loan.
Some famous personalities like actors, singers, sports stars, etc have gone bankrupt because of credit card debt.
Credit Cards in India
Credit cards are great – for people who are smart with them.
Credit card companies make a big portion of money from people who are not smart with their credit cards.
Most major banks have a credit card program – it is a great business. There are even companies that are not banks but have credit cards.
Credit cards are now gaining popularity in India.
Smart people are reaping the benefits of these cards.
And then, of course, there are those who are paying late fees, paying interest, or defaulting.
6-Day-Course
Theme of the week: NBFC
Day 6 - Sunday
We’ve reached the end of this week’s course that started on Monday.
Here’s a test you should take. Get pen and paper!
Question 1:
Which of the two cannot accept deposits from depositors?
-Bank
-NBFC
Question 2:
If all of a bank’s customers want their money back at the same time, what will happen?
-Nothing. Everything will be fine
-Bank will collapse
Question 3:
From where do NBFCs get most of their money from?
-Mutual funds
-Hedge funds
-Pension funds
-Banks
-All above
-None of the above
Question 4:
Which of the two needs to adhere to the reserve ratio compliance?
-Banks
-NBFC
-Both
Question 5:
Which can give home loans?
-Banks
-NBFC
-Both
Answers:
Q1: NBFC
Q2: Bank will collapse
Q3: All above
Q4: Banks
Q5: Both
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