Last Updated on 1 year by AlexJames
A credit card is a promising substitute for cash and is a vital element of your financial strategy if used wisely.
That is why, before applying for a credit card, you must have a good grasp of how credit cards function.
Utilising credit cards responsibly can help you build your credit score by exhibiting to lenders that you can be trusted to repay your obligation reliably and on time.
However, stacking up debt you cannot pay will damage your score, making loans more expensive in the future.
Here we will look at some credit card information, how they work, and why they can benefit you.
This guide will explain how credit cards can assist you in making your life easier.
Terms related to credit cards
Credit cards are plastic cards that allow you to pay for products and services based on your promise to repay.
Before understanding how do credit cards work, let us know some commonly used credit card terms.
1. Annual Percentage Rate (APR)
If credit cardholders do not pay the credit bill on time, they will be levied interest known as APR on the outstanding amount.
2. Credit limit
A credit limit means the maximum amount of money that a cardholder can borrow against their credit card.
3. Billing cycle
The interval between two statement closure dates is referred to as a billing cycle, sometimes known as a statement period.
In other words, it relates to how long it takes for your credit card statement to arrive.
4. Minimum payment
When a cardholder receives a credit card statement, they have to pay the outstanding amount on the card.
However, they are obliged to pay a minimum sum known as minimum payment towards their monthly credit card balance, even if they do not pay the bill in full.
5. Interest-free period
Credit card companies provide cardholders a grace period (interest-free period) after the bill is generated, which is the time between the billing cycle and the due date.
This is the amount of money you owe on your credit card.
How do credit cards work in India?
To understand how credit cards function, it is helpful to realise that several players maintain the system:
It is the place from which you will be purchasing something. It may be a supermarket, an online store, or countless other enterprises.
2. Acquirer Bank:
It manages the transactions of the merchant.
It connects your card to millions of merchants who accept credit cards. Examples include Visa or MasterCard.
4. Issuer Bank:
It gives you a credit card and registers you as a cardholder.
Now that you know who the parties are on a credit card, let us know how it works.
Once you apply for a credit card, the bank will approve it and you can start making purchases through it.
When you make a purchase, the merchant will request an authorisation code from your bank and the merchant’s bank.
Your bank will double-check your details before approving or rejecting your transaction.
If your bank approves the transaction, your bank will pay the merchant’s bank, decreasing the amount of available credit on your credit card account.
Your bank will send you a monthly statement detailing all of the purchases made in your account during that period.
The credit card statement will reflect the entire amount owed and the minimum amount due.
Additionally, any payments you made to your credit card account in the preceding month will appear on your statement, and any charges or interest carried forward from previous billings.
When it is time to pay your bill, you will have two options: you can pay the entire balance in full or make a minimum payment.
People must make monthly payments of at least the minimum amount due on their credit card balances to keep their accounts in good standing and avoid penalties.
If you pay only the minimum amount, the bank will charge interest on the remaining amount outstanding.
When making purchases, credit cards provide ease and security, and they can also help you establish your credit history.
You can shop online or in person using a credit card instead of carrying cash or a chequebook.
Further, if someone loses their card, they can disclose it to the issuer. The issuer can then provide them with a new one.
Credit cards are linked to reward programmes that give customers points, miles, or other incentives.
Credit cards have a complicated fee structure, but certain cards do not charge interest if you pay off your balance monthly.
Additionally, you should never give out your credit card information to anyone.
Before choosing a credit card, assess the benefits and drawbacks and ensure you understand the terms and conditions.
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