How do Credit Cards Work?

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Credit cards operate on the principle of ‘Buy Now, Pay Later’, which is the concept of revolving credit. Essentially, a credit card issued by any financial institution allows you to make payments at Point-of-Sale (PoS) terminals or shop online. You can do so on borrowed funds up to a pre-approved limit. This credit limit is essentially an advance given to you which you can repay at the end of each billing cycle. With a credit card, you can just make a purchase and worry about the bills at the end of the month. 

Let us explain this process step-by-step.

Where can you use Credit Cards?

Just like other cashless modes of payment, credit cards are widely accepted today across the following outlets:

  1. At any physical store with a PoS machine; whether it is a mall or a high-end bakery or a tiny mom-and-pop store, you can use your credit card without any hassle.

  2. When you are shopping or booking tickets online or basically making any payment online for a product or service, you can process the payment with your credit card.

In fact, if you are using the Bajaj Finserv RBL Bank SuperCard available on Finserv MARKETS, you can also enjoy the benefit of converting the costs of your purchases into EMIs. These costs will be treated the same way in your credit card bill; the only difference is that instead of the entire amount being billed upfront, only the EMI amount will be charged in your credit card bill for a particular month.

What Happens When You Use a Credit Card for Payment?

When you use a credit card for any transaction, the amount is deducted from the overall credit card limit you are allowed. As long as you are within your approved credit limit, you can make as many transactions as you want. At the end of each month, you will receive a credit card account statement for the purchases made.

What is a Credit Card APR? How Does Credit Card APR Work?

APR or the Annual Purchase Rate is the yearly charge you have to pay for borrowing money on your credit card. However, in most cases, you can avoid paying APR on your credit card by clearing all your credit card bills and outstanding balances by the stipulated due dates.

Credit card APR is calculated on your account balance. So for instance, if your credit card balance is ₹1,000 and the APR issued is 30%, and you fail to clear the balance on the due date, you will have to pay a total of ₹1,300 after a year. However, in case you have cleared all your credit card payments on time, you can close the balance at ₹1,000 only, without having to pay the APR charge.

There are different types of APRs you can be charged on your credit card. These include:

  • Standard APR: Charged when you carry the balance from one month to another

  • Balance Transfer APR: Charged in case you opt for a balance transfer on an old credit card to a new one

  • Cash Advance APR: Charged when you borrow cash against your credit card

  • Penalty APR: Charged by the credit card issuer in case you fall behind your credit card dues

What are Some of the Common Credit Card Fees?

Some of the common credit card fees that you might need to pay include:

  • Annual Charges: Certain credit card issuers charge an annual fee every year to keep the credit card active. 

  • Late Payment Charges: These are the penalty charges that may be issued in case the cardholder fails to clear their credit card dues on time.

  • Foreign Transaction Fees: Certain credit card issuers charge a certain fee on making transactions in foreign currency with your credit card. Generally, a forex mark-up of 1%-3% is charged, depending on the credit card issuer’s policies.

  • Cash Advance Fees: In case you borrow cash against your credit card, you might be charged with a cash advance fee by the issuer.

  • Annual Percentage Rate: In case your balance is not paid in full by the due date, you are charged with a certain annual percentage rate (APR) as an interest. This APR might be fixed or flexible based on your credit card agreement.

  • Balance Transfer: When the outstanding payment is transferred from one credit card to another, you might be charged with a balance transfer fee.

  • Overlimit charges: In case you exceed your balance over the stipulated credit limit, the credit card issuer will charge an overlimit fee.

What is a Credit Card Statement?

The credit card statement summarises the transaction details of your card and provides the complete picture of your expenses for a particular bill cycle. This statement condenses all that you need to know about the level of spending you are operating at for the particular billing period. The statement is an important piece of paper as it contains extensive details about your credit card usage, including the following:

Account Summary

The account summary is an overview of your credit card activity. All the payments and transactions you make during the billing period or cycle will be reflected in a specific format. Since this is the most important information anyone looks for in a credit card summary, it is usually the first section of the statement.

Other sections reflect:

  • Available credit and cash limit

This refers to the proportion of the credit limit you exhausted in the previous cycle.

  • Minimum Payment Due

This is the minimum payment you must make against the total bill to keep your card active. It is usually 5% of the total outstanding. If not in full, you should definitely pay your minimum due by the due date each month to avoid late payment charges.

  • Total Payment Due

This is the total outstanding due against your credit card. You start accruing interest if you do not pay your credit card bill in full each month.

  • Due Date

This is the date by which the minimum or total outstanding due must be paid.

  • Interest and Fees Charged

Information about any interest charged for late payments or fees charged for services and transactions are mentioned in the transaction summary. The idea is to disclose all information for your perusal.

  • Payment Methods

All the different modes of bill payment are reflected here. Depending upon your issuer, it will mention conventional options like cheque and draft or novel ones like mobile wallets, UPI payments, net banking etc. In any case, make sure you do not overshoot the due date. If you are not able to do so, interest will be charged on the outstanding amount. It will keep compounding until the repayment is made, so the sooner you can repay the better.

Credit cards are here to help you establish a credit history - make sure you use them to your advantage. Delaying payments will negate the credit history you aspire to build.