01 September 2011
Why Does the Credit Issuer Offer Credit Cards?
In these times of financial constraints and rising prices why do you think the credit card companies offer credit? Purchasing power to the customer to spend their money, and that too, during a certain due period without any interest?
They do have many benefits and this is indicated by the number of credit card companies and banks involved in offering credit to customers at attractive offers. Firstly having a credit card allows the individual financial freedom (and this very often results in more impulsive purchases). Since we all know there is a tendency to spend more when we have to pay later, this is in benefit of the issuer. For the shop owners this transaction is safe as they get the amount from the credit card issuer, irrespective of the client paying or not. Banks commit to pay the merchants immediately when the purchase is made.
These financial lending companies and banks have to offer money for transactions and they earn on interest. It is their business to offer money on loan for use by the customer. Banks usually charge from 1 to 3% of the amount to the merchants for every money transaction made. Hence sometimes if the purchase does not involve big amounts the shop keepers are reluctant to accept payment by credit cards. The shop owners also sometimes add taxes extra on the billing of the customers to share the extra cost incurred by the use of credit card by the customer.
They also earn on late payments done after the grace period is completed. Interest is applied on all transactions and also due payments in case the customer fails to pay the amount within the due date. If the client does not balance his expenses and very often they overdo their expenses than the line of credit offered to them, then they often result in paying more interest to the card issuers.By encouraging to spend they very often lead us to make unnecessary purchases which are done on impulse. Spending over the credit limit the client has to pay over limit fees to the credit card issuer. Processing fees and yearly administrative fees also amount to a certain percentage of the payment by the credit card user. When any transaction is done using foreign currency then the credit benefits in terms of conversion and exchange rate of that currency.
And most importantly by encouraging more sale they keep the money rotating which is beneficial to the whole economy. Money moves from the credit issuer to the credit card user and later back to the credit issuer and in between the merchants and service providers benefit.
This type of transaction is becoming more and more used by many individuals for their benefits and though the common man was lured by this magic card in the beginning many of then have now learn t the mantra for effective use of credit card making it more and more difficult for credit card providers to maintain their customers!