How do Credit Cards Work?

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. 

 

Credit cards have a pre-approved limit given to you as an advance, which you can repay at the end of each billing cycle. This is how credit cards work as a tool. To know more about how credit card payments work, read on.

When you transact with a merchant using a credit card, an entire payment system works behind the scenes. Here is a brief overview.

• Authorisation: The merchant swipes your card in the PoS machine and you will be requested to enter the PIN. The credit card payment network checks whether you have sufficient balance and, if yes, the transaction is processed.

• Batching: The merchant sends all the collected receipts to the acquirer bank to receive payments.

• Clearance: The merchant’s bank requests approval from your bank on the payment network. Your bank then transfers the amount deducting the interface charges.

• Funding: Finally, the acquirer bank credits the merchant’s bank account after deducting the merchant fee.

Just like other cashless modes of payment, credit cards are widely accepted today. You can make credit card payments at the following:

• Physical Store: You can use your credit card with a PoS machine at malls, high-end bakeries or retailers, or a tiny mom-and-pop store 

• Online Payments: You can use your credit card when making any payment online for a product or service, whether shopping or booking tickets online.

 

In fact, you can make such payments using the Bajaj Finserv RBL Bank SuperCard available on Bajaj Markets. It allows you to convert the costs of your purchases into EMIs treated the same way in your credit card bill. 

 

Instead of the entire amount being billed upfront, you only have to pay the EMI amount on your credit card bill for a particular month. So, apply online and enjoy some of the best credit card offers in the market. 

The bank deducts the transaction amount from your overall credit card limit when you use a credit card for any transaction. 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.

To know how credit cards work, you must be familiar with credit card statements. A 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 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:

1. Account Summary

The account summary is an overview of your credit card activity. All the payments and transactions you make during the billing cycle gets reflected here. 

 

Since this is the most important information anyone looks for in a credit card summary, it is usually the first section of the statement.

2. 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

You must make the minimum payment against the total bill to keep your card active. It is usually 5% of the total outstanding. If not in full, you must pay your minimum due by the due date 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

It is the last date to pay the minimum or total outstanding amount.

• Interest and Fees Charged

The transaction summary also informs about any interest charges for late payments or fees for services and transactions. The idea is to disclose all information for your perusal.

• Payment Methods

All the different modes of bill payment get 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 add up to 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 negatively affect the credit history you aspire to build.