Each person experiences it. As you browse through the mail you have in your hands, you notice a notice from a bank or issuer informing you that you are eligible for one of their credit cards. Great! What does that signify, though?
Regardless of whether you concluded it was fraudulent mail or something to investigate, it got you wondering: How do credit cards operate? Whatever stage of your financial journey you are in, understanding credit cards and how to use them effectively is crucial to understanding and managing your money.
What is a Credit Card ?
With the ability to be used for purchases, balance transfers, and cash advances, a credit card is essentially a loan from a bank or other financial institution. Your line of credit, or the amount made available to you, is based on your credit score and other financial variables. Each month, you are required to repay what you have borrowed, whether it is the full amount or only the required minimum installments. Depending on the type of credit card, there can be annual fees as well as interest applied to any balance that is left over after a pay period. Your credit score is ultimately impacted by this process as well as your capacity to repay the debts you have incurred.
How does Credit Card Work Offline ?
Step 1: The procedure of utilising a credit card. A good example is when you pay with your credit card at the register after finishing your purchase at your preferred retailer. The shopkeeper will insert or swipe your card through a point of sale (POS) device. The shop will often ask you to enter a PIN in order to validate the purchase. The transaction must be verified as authentic.
Step 2: The device reads the strip or chip (which contains data used to identify the card) and sends it, together with the PIN, to the bank that issued the card (in the case of your Kotak Mahindra Bank credit card, that bank would be the issuing bank).If everything (credit limit, identity, validity, etc.) seems to be in order, the bank approves the purchase.
Step 3: If the transaction is accepted , the system prints two charge slips or receipts; the retailer keeps one and gives you the other. If a PIN is not required, the retailer may request your signature on a copy of the charge slip.
The purchase is billed on your subsequent statement, and the store gets the money within a few days. The entire process goes without a hitch thanks to the systems and technologies used by Visa and Mastercard.
How does Credit Card Work Online ?
The following details will be requested by the online retailer when you make a purchase:
Select your payment method first between Visa and Mastercard.
Enter your card's 16-digit number after that.
Period of expiration
Name as it is shown on the card
Occasionally, the billing address
The data is sent to your bank by a payment gateway when you click the paid sign. A one-time password (OTP) is sent by the bank to your registered email address or mobile number in order to authenticate the transaction. If the OTP is accurate, your transaction is finished.
Terms to understand the working of a credit card
Interest : It is a key factor in how credit cards work. You are borrowing money from the issuer every time you use a credit card to complete a transaction. It's comparable to taking out a loan with the potential for interest payments. This only applies, though, if you don't pay the whole amount of the charge. If you don't pay a balance in full, interest will be applied. It's also important to keep in mind that interest on credit cards is billed monthly rather than yearly. For instance, interest may be charged at a rate of 3% monthly, or around 36% annually.
Credit Limit : Each credit card has a set amount you are not allowed to spend in a given period of time. When you attempt to use a credit card after it has reached its maximum limit, the credit card company may refuse the transaction. Numerous factors, including the kind of credit card you have, your income and capacity to pay, any other commitments you might have, your credit score, and your payment history, as well as your credit history and credit score, affect the credit card limit. You might be able to boost your credit limit if your credit history is good, according to the credit card company.
Billing cycle: This is the window of time before the bill is due that you can make purchases. It will give you additional credit time, or the amount of time before you have to pay for the transactions, if you make purchases early in the process.
Minimum Payment : You must make at least a certain number of credit card payments each month. You may be required to pay a fee if you don't do that. You may carry forward any excess funds, but you will be required to pay interest on them.
Balance : Your credit card's balance is the sum of all of your outstanding purchases.
Credit cards could help you create credit if they are used properly. You might be able to build and maintain good credit by paying your bills on time, keeping your debt low, and only using credit cards when absolutely required. Additionally, keep in mind that paying off your credit card balance in full each month is a great way to avoid paying interest. The usage of a credit card requires judgment and due diligence. It's usually a good idea to live within your means and refrain from spending money on things you can't afford. Furthermore, you'll be in a lot of trouble and end up paying a lot of interest if you can't pay off the entire sum on your card each month. So, utilize your credit card wisely.