How does credit card work? A beginner’s guide to maximising rewards | Mint
Source: Live Mint
Using a credit card can be daunting for beginners, but understanding its functioning can help you use it efficiently and make timely bill payments. Let’s dive into how credit cards work, key terms, and the process behind transactions.
What is a credit card?
A credit card is a form of borrowing with a defined credit limit offered by a bank or non-banking financial company. You can borrow money up to this limit, which must be repaid by the due date or can be paid in instalments (EMIs).
Important credit card terms
- Billing cycle: The period between two consecutive credit card statements.
- Credit limit: The maximum amount you can borrow using your credit card.
- Minimum payment: The minimum amount, including EMIs and other charges, that you must pay if you cannot repay the total balance.
- Interest: A fee charged on any outstanding balance on your credit card.
- Balance: The amount spent on the credit card that has not yet been repaid.
How does a credit card work?
A credit card allows you to borrow up to a certain limit with the promise of repaying the amount before the due date. If you fail to repay by then, the issuing bank will charge interest on the unpaid amount.
Transaction process
- Verification by the merchant: When you make a purchase, the merchant sends transaction details to the payment gateway for verification.
- Authorization process: This information is forwarded to the issuer bank for further processing. The issuer bank verifies your credit limit and other details, then either approves or declines the transaction.
- Payment completion: Upon approval, the merchant accepts the payment, and the spent amount is added to your billing cycle.
How credit card transactions work
When you swipe your card at a point-of-sale (POS) machine, you will be prompted to enter your PIN. The network checks if you have sufficient balance and either approves or declines the transaction.
Once approved, the merchant collects the receipt and sends it to the acquirer bank (the bank where the merchant has an account) to process the payment. The acquirer bank then requests the issuer bank to complete the transaction. After charging certain fees, the issuer bank finalises the transaction, and the acquirer bank pays the merchant.
Online credit card transactions
When shopping online, select the credit card payment option. After you click “Pay,” the issuer bank receives your information. You will then receive a one-time password (OTP) for verification. Once you verify the OTP, the bank processes the transaction.
In conclusion, a thorough understanding of how credit cards work will help beginners choose the right card and manage their finances effectively. Familiarising yourself with important terms and processes will also aid in making timely bill payments.
Frequently asked questions (FAQs)
Who can get a credit card?
A credit card applicant must typically be at least 18 years old (some banks require a minimum age of 21). Applicants must be salaried or self-employed. Banks also evaluate eligibility based on annual income, which varies by institution.
How can I check if I am eligible for a credit card?
To check your eligibility, visit the bank’s website for criteria and documentation requirements. Alternatively, you can contact customer service or visit a bank branch for information.
How long does it take to receive a credit card?
After submitting your application and required documents, processing usually takes about two weeks. Once verified, the bank will send your credit card within seven working days and notify you via SMS or email.
Is there a joining fee for a credit card?
The joining fee for credit cards varies by bank. Some institutions charge a fee, typically ranging from ₹100 to ₹1000, while others may offer zero fees.
