Introduction
Credit cards can be convenient when you need to make a purchase or pay a bill, and they also have the potential to help you save money if you can recoup part of your expenses through incentives. In addition, you can utilize credit cards to establish a positive credit history by practicing sound money management.
When you apply for a credit card, a type of unsecured borrowing, a bank or NBFC agrees to provide you a set credit limit. You can make transactions up to the specified limit and pay them off on time, or you can turn them into EMIs and spread the cost over a few months. Credit cards have a revolving credit account as opposed to installment loan accounts like personal loans or auto loans. As long as you keep making payments on your account, you can borrow money repeatedly.
What Is A Credit Card?
One kind of revolving credit account that allows you to borrow money frequently and pay it off over time is a credit card. An installment loan, on the other hand, like a mortgage or auto loan, provides you with the entire loan amount up front and requires monthly payback over the course of the agreed-upon repayment period.
Your overall balance is increased when you use a credit card to make a purchase. As long as your entire debt stays below the credit limit on your card, you can continue using it. By making payments on your balance, you can increase the amount of available credit on your card.
Your monthly statement balance is calculated by adding the total of all of your transactions, including purchases, balance transfers, fees, interest, and payments. A statement detailing the entire amount owed, the minimum payment required, and the due date is sent to you.
Making the bare minimum payment before the due date can help you maintain the good standing of your account and prevent late payment penalties. But after that, you’ll have to “revolve” the debt and pay interest on the amount that is still owed. You usually won’t incur interest on your purchases if you pay the entire statement balance each month.
Financial companies issue credit cards, which are tiny, rectangular pieces of plastic or metal that let you make purchases online and off up to a pre-approved limit.
How Credit Card Works?
Credit cards can be used for bill payment as well as in-store and internet shopping. Your credit card information is transmitted to the merchant’s bank when you use a credit card for either of them. The credit card network then grants the bank permission to handle the transaction. After confirming your details, your card issuer must decide whether to allow or reject the transaction.
If the transaction is accepted, the merchant is paid, and the transaction amount is deducted from the available credit on your card. Your card issuer will give you a statement at the conclusion of your billing cycle that includes all of the transactions made during the month, your current and past balances, the minimum payment required, and the due date.
The time frame between the date of a credit card purchase and the due date indicated on your statement is known as the grace period. There are no interest charges during this time provided you pay your account in full before the due date.
However, your card issuer may charge you interest if you carry a balance from month to month. Your credit card’s annual percentage rate (APR) is the annualized cost of carrying a balance. Your interest rate plus additional expenses, including any yearly fees your card may have, are included in your APR. The APR on the majority of credit cards is variable and based on the prime rate. Although the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 establishes stringent limitations on when credit card firms can and cannot raise your rate, this means that your card’s annual percentage rate (APR) may alter over time.
The consumer, or you, is the most crucial link in the credit card network. As a result, it is crucial to be completely aware about all issues related to card selection and usage. But it’s also crucial to have some understanding of “what lies beneath.”
In the value chain, there are four main actors besides the card holder.
- Issuing Banks: Credit cards are issued by nearly all banks, as well as a few neobanks as of late. This marks the beginning of the customer lifecycle from the standpoint of the bank.
- Payment processing networks: Such as Visa, Mastercard, Diners, and RuPay, facilitate the seamless settlement of transactions by linking banks, merchants, and customers. Their ability to effectively maintain and run an enabling technical capability on a 24×7 basis, at a global scale.
- Merchants: Any establishment where you would use the card, including hotels, airlines, malls, online stores and petrol stations. At these outlets, an Electronic Data Capture (EDC) device is installed by the acquiring bank. The merchant swipes your card when you make a purchase and gets immediate authorization to complete the transaction.
- Acquiring Banks: Install their EDC equipment with merchants at points of sale. You might use an HDFC card (issuer) at a location that has an Axis Bank EDC machine (acquirer). A network, like Visa, facilitates the switching. Both domestic and international transactions are subject to this. The organization that makes sure the merchant is paid on schedule is known as the acquiring bank.
How Credit Cards Transactions Works?
Let’s examine what happens when the card is swiped at a store. We have broken down the entire process into four crucial steps:
| Authorization | Batching | Clearing | Funding |
| Your card will be swiped by the clerk or inserted into a POS device. There will be a PIN entry prompt. The network will determine whether there is enough money in your account, and if so, it will allow the transaction. | The acquirer bank receives all of the receipts that the merchant has gathered throughout the day in order to process payments. | The network is used by the acquiring bank to communicate a request to the relevant issuer bank. After deducting the interchange fees, the issuer bank transfers the remaining funds to the acquiring bank. | The acquirer bank will pay the merchant after deducting the merchant fees from the payment. |
How Does A Credit Card Work Online?
The e-commerce merchant will ask for the following details when you use your credit card to make an online purchase:
- The card’s pin number
- Expiry date and CVV
- Your name
- Expense information
- A payment gateway sends the data to your bank when you select the “Pay” option. For authentication, the banks will issue an OTP to the email address or registered mobile number you provided. The transaction will be completed after the proper OTP is provided.
How Do Credit Card Payments Work?
Payments made by credit card are due every month on the same day, or the following business day, if the due date falls on a weekend or holiday. When the monthly cycle (sometimes referred to as a billing or statement period) concludes, you will receive your statement along with the bill around three weeks sooner.
You might get your statement and charge on March 31 if your billing cycle closes on that date, for instance. The first day of the following billing cycle is April 1, and the last day of the previous billing cycle is about April 22.
Although the overlapping dates can be perplexing, there are three crucial numbers to keep in mind:
- The balance on your statement at the conclusion of your billing period. If you settle your statement balance in whole each month, you will not be charged interest on purchases.
- smallest payment: To keep your account in good standing and prevent late payment fines, you can pay less than the minimum amount required by the deadline.
- Existing balance: Logging into your account will allow you to see your current balance. It will include recent actions taken, such as payments and purchases made following the conclusion of your most recent billing cycle. Although you don’t have to pay this money right immediately, keeping track can be useful if you’re budgeting.
- You may also enable automatic payments from a linked bank account or set up alerts for when your payments are due. You can have a choice with autopay as to whether you wish to pay the minimum amount, full statement balance or some other amount.
Financial Working Of A Credit Card
With a credit card, you are truly operating with a zero balance. Every time you use your credit card to make a purchase, you are borrowing it from the corporation that issued the card. Additionally, there is a deadline set by the credit card business by which you must repay the money you borrowed. If the entire or a portion of the due amount is not received by the issuer bank by the due date, interest will be imposed on the amount you had borrowed. As long as the whole amount is not paid back, they will continue to charge you a predetermined percentage of interest on both your past-due balance and new purchases. But there won’t be any interest added.
Working Of A Credit Card At A Retail Store
Let’s now examine how a credit card functions in a physical business.
- When you have finished selecting the items for your daily necessities from your preferred retailer, you head to the checkout counter and hand your credit card over to pay. Your card will subsequently be swiped or inserted by the shopkeeper into a Point of Sale Device. Your Personal Identification Number (PIN) may then be required by him in order to confirm the transaction.
- Once the magnetic strip on the back of the credit card has been read, the POS device will send the information, along with the PIN, to the bank that issued the credit card. The issuing bank will then approve the initiated transaction if everything appears to be in order.
- The system will produce two receipts for the accepted transaction, one of which will be presented to you and the other retained by the store clerk.
- Thanks to the technologies that Visa or MasterCard have provided, the entire process appears to be simple and flawless.
Conclusion
If used carefully, credit cards can help you develop credit. You can improve and preserve your credit by paying your bills on time, keeping your balance low, and only applying for credit cards when absolutely necessary. Remember that paying your payment in full each month is the greatest way to prevent interest fees, establish a solid credit score, and avoid late fees.
You can use credit to make purchases with a credit card. It is very similar to borrowing money to cover a credit card purchase. You won’t have to pay interest if you pay your account in full each month, but if you can’t, you’ll have to pay interest on the amount still owed. Despite the complexity of credit card operations, Visa and MasterCard’s systems make them seem effortless. A credit card is an excellent tool for managing your finances and for establishing credit if it is used responsibly.
Some Credit Cards to look at
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I am an Undergraduate Student pursuing BA English Hons in KIIT University. My hometown is in Cuttack, Odisha. My hobbies include dancing and singing.