How do Credit Cards Work

How do Credit Cards Work?

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04 Dec 2019

A credit card is an instrument that lets you make payments for transactions at that moment with just a swipe of the card, and later on, pay the accumulated sum of money in the form of your credit card bill.

Credit cards operate on the principle of ‘buy now, pay later’, which is the concept of revolving credit. Essentially, a credit card is just a plastic card - a chip card issued by financial institutions (could be either bank and non-banking financial institutions), that allow you to swipe the card at a POS or shop online to borrow funds for your purchases up to a pre-approved limit. This credit is essentially an advance paid to you, which you can repay at the end of the stipulated time period. It takes away your worry of remembering if you have enough funds in your bank account or not. So every time that you make a transaction, you can just swipe the card and worry about the bills at the end of the month when the consolidated statement arrives. 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:

One, you can use credit cards at any physical store or chain with a point-of-sale (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.

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

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. The treatment of these costs will be the same in your credit card bill, the only difference being that instead of the entire amount being billed up front, only the amount of EMI 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 just taken from the overall credit limit you are allowed. For every transaction, the merchant fee, on your behalf, is paid by the financial institution issuing you the card.

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 an account statement.

The account statement summarizes the transaction details of your card and provides the whole picture of your expenses. This statement condenses all you need to know about the level of spending you are operating at and whether you want to budget accordingly.

The statement is an important piece of paper as it also contains extensive detail, including the following:

Account Summary

The account summary is an overview of all the amounts and balances. All the payments and transactions you made 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, this information 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

No matter how many transactions you do - even if you do not transact at all during a month using your credit card - there are still minimum charges to be paid as service costs each month.

  • Total payment and the due date

As is self-explanatory, your total payment and the date by which it is due is mentioned usually in bold.

  • Interest and fees charged

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

  • Payment methods

Here all the modes of bill payment are reflected. Depending upon your issuer, it will mention conventional options like cheque, draft or novel ones like mobile wallets, UPI payments, net banking etc. In any case, make sure you do not overshoot your deadlines. You need to repay the amount within a stipulated time period, and that is generally 20 days as a norm. 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 to your advantage. Delaying payments will erode that credit history you were trying to build.