Banks provide a helpful service to those who cannot make all their purchases in cash. Banks and other financial institutions could approve a credit card account to those approved. Issuing a credit card does more than help the person using it. Banks benefit, too.
Credit Cards and Interest
Credit cards provide a way for banks to collect interest, and interest payments on loans offer banks an opportunity to generate revenue. Ironically, many credit cards come with a grace period that offers a chance to pay balances without accruing interest. Of course, there are enough account holders paying interest for the banks to reap profits.
Adding Liquidity to the Bank
Banks lend money and receive payments with interest. The interest adds to the bank's liquidity, allowing the institution to cover customer withdrawals when performed. Also, the interest payments could help cover the issuance of larger loans, ones that might prove further profitable for the lender.
The Consumer’s Focus
While learning about how banks make money through interest payments is helpful, account holders are likely concerned about how much a credit card costs. Determining what is a good APR for a credit card helps an applicant figure out whether the card will become costly to them. As SoFi Invest points out, the “APR on a credit card represents the total cost of the loan expressed in annual terms.” That total cost factors into a bank’s ability to collect revenue.
Performing Comparison Shopping Steps
Banks compete with one another, leading the institutions to compete for customers. Those with a decent credit history might find several options available. A thorough comparison of available credit card offers could lead to acquiring a preferred card with a decent APR. Consider that a reason why improving a credit score is helpful.
Overall Costs Associated with Credit Cards
Credit card companies rely on other fees besides interest to make lending money profitable. For example, cash advances could come with fees beyond the requisite interest payments. A particular credit card may establish a fee when using the card to pay for a money transfer. And there are other costs, such as annual fees, that add money to the bank's balance sheets.
Late Payments and the Financial Consequences
Not everyone makes payments on time, and a bank might charge a late payment fee. Account-holders could review the terms to see what the costs are. Sometimes, a credit card company may allow one missed payment, but others might be less generous. Be aware that not paying anything towards the balance means the interest accrues. Credit cards may become more costly than expected when someone doesn’t pay on time.
Drawing in More Customers
Issuing credit cards could serve as a gateway for banks to sign up checking and savings account holders. Those happy with the bank's credit card division may expand their personal and business dealings with the company. A bank might benefit greatly.
Credit cards deliver a way for banks to make money by issuing small loans for purchases and cash advances. Other associated fees could generate money for the bank, too.