Interest rates of the credit cards are the primary way (there are of course other ways as well) through which the institutions that issued the credit cards generate the income received from the business activities.
Institutions that issue the credit cards are either banks or credit unions that provide a consumer with the card that can be used for a number of different paying purposes and loans. The bank operates by paying the payee and then charging a certain amount of additional money that accumulates over the time period during which the money is loaned. Still, the largest profit of the credit cards issuers comes from the fee taken for every processed transaction which can be around 4% of the overall transaction value.
The rules regarding the timely payments are usually very firm since the bank can actually suffer losses in cases when the card holder is prevented from returning the money on time. That is why the financial and the borrowing background of the holder are thoroughly investigated so that the credit risk can be estimated before the loan is approved and the rates are determined. This implies detailed interviews, examining the financial documentation of the applicant and indentifying the loan history on national and international level.
Variations of the interest rates can be significant. Some of the credit cards loans are back up by the estate that a person owns and can therefore be very low – 6 or 12%. The percentage of the rates can range from 7 to 36 % and that normally depends of how the bank evaluates one’s credit history. The percentage of the interests can differ from country to country, and Brazil has higher rates (around 50%).
There are laws in many countries that control the interest amount which can be charged. In most countries the regulations regarding the way rates are charged and calculated are very strict. What is more, in some Muslim countries, charging interests is against the law and other ways are designed to ensure the return of the loan and profit of the issuer (ownership interest for example).
A number of banks provide exceptions when it comes to the regular calculating method, and there are various perks for paying on time and in an orderly manner. For instance, a person can obtain a discount if the account is paid off for two months in a row, while the calculation system can change when the payments are late.
There are also promotional interest rates that are offered to attract the potential clients and the interest rates can be either very low or even inexistent for a certain period of time.