What is Credit Card? and how does it works ?

What is Credit Card ?

Credit card is a type of financial device provided by banks, which provides customers the ability to borrow money within the pre-fixed credit limit.  It entitles users to make purchases, transactions and avail services up to the Approved Credit Limit.  Credit card limit is determined by factors like income and credit score, which also affect the credit limit.

 What has happened to the credit card?  On inspecting the credit card, you will get the necessary details including Card Number, Cardholder Name, Expiry Date, Signature and CVV Code.  A notable aspect of a credit card is that it is not directly linked to a bank account.  So, whenever you swipe your credit card, the amount spent is deducted from your credit card limit and not from your bank account.  This tool can be used for expenses like Food, Clothing, Medical Bills, Travel costs and various lifestyle products and essential services.

How does Credit Card Work  ?

 If you are considering getting or applying for a credit card, it is important to understand what a credit card does and how it works.  Credit cards can be used to buy goods online or in stores as well as pay bills.  When you use a credit card for any of these purposes, your card details are sent to the merchant’s bank.  Then, the bank receives authorization from the credit card network to proceed with the transaction.

 Later, your card issuer verifies your information and accepts or rejects the transaction.  If the transaction is accepted, payment is made to the merchant, and your available credit on the card is reduced by the transaction amount.  At the end of your credit card’s billing cycle, your card issuer will send you a statement detailing all transactions for the month, your past and current balances, the minimum payment due and the due date.

 Grace Period is the time between the purchase date on your credit card and the due date listed on your statement.  During this period, if you pay your bill in full by the specified date, no interest is charged.

 However, if you carry a balance from month to month, your card issuer may charge you interest.  The Annual Percentage Rate (APR) of your credit card reflects the cost of carrying an annual balance.  This includes your interest rate and any other associated fees, if applicable.

How many types of credit cards are there :

 As a potential credit card holder, it is essential for you to gain a proper understanding of the different types of credit cards available in the market.  Additionally, knowing what is included in a credit card and choosing the right type can increase your benefits substantially.  This not only helps in taking informed decisions but also ensures that you get the most out of various transactions using the chosen credit card.  Below, we have provided a brief description of some common credit card types in India:-

  • Shopping Credit Card
  • Travel Credit Card
  • Fuel Credit Card
  • Entertainment Credit Card
  • Premium Credit Card
  • Secured Credit Card
  • Rewards Credit Card
  • Student Credit Card

How to use credit card :

 Before using a credit card, the cardholder must remember that the money being spent must be returned to the bank on time.  To do this, credit card users should keep an amount equal to the credit card expenses in a separate bank account.  By doing so, they can also earn interest on the deposits from the bank and, when the repayment period of the credit card funds is near, they can transfer the money from the separate account to the credit card account.  This practice not only helps in earning interest but also ensures timely payment of credit card dues.

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