How do Credit Cards Work? - Kotak Bank

A credit card is a card that may be used to make purchases, pay bills, or withdraw cash (depends on the card). Essentially, a credit card is a kind of short-term loan. Your credit card issuer sets a credit limit when you create an account; this is the amount of money your credit card company permits you to spend or pay bills with.

How Do Credit Cards Work Offline?

Step 1: This is the first step in the process of using a credit card. For instance, you've finished shopping at your favorite store and use your credit card at the register. Your card will be swiped or inserted into a point of sale (POS) machine by the storekeeper. To confirm the purchase, the retailer would usually require you to enter a personal identification number (PIN). It is essential to authenticate the transaction.

Step 2: The machine scans the strip or chip (which includes information to identify the card) and transmits it to your issuing bank, along with the PIN (for example, Kotak Mahindra Bank will be the issuing bank for your Kotak Mahindra Bank credit card). The bank accepts the purchase if everything appears to be in order (credit limit, identification, validity, etc.).

Step 3: The machine prints two charge slips or receipts if the transaction is accepted; the merchant keeps one and gives you the other. When a PIN isn't necessary, the merchant may ask you to sign a copy of the charge slip instead.

The transaction is invoiced on your following statement, and the store receives the funds within a few days. Thanks to Visa and Mastercard's systems and technologies, the entire procedure runs smoothly.

How Do Credit Cards Work Online?

When making an online purchase, the e-commerce business will ask for the following information:

  • First, choose if you are using a Visa or Mastercard
  • Then enter your 16-digit card number
  • Expiration date
  • CVV
  • Name as it appears on the card
  • Address for billing (occasionally)


When you click the paid sign, a payment gateway sends the information to your bank. To authenticate the transaction, the bank sends a one-time password (OTP) to your registered email address or mobile number. Your transaction is complete if the OTP is accurate.

Terms to Understand the Working of a Credit Card

  • Interest: This is a crucial component of how credit cards When you use a credit card to make any transaction, you are borrowing money from the issuer. It's similar to taking out a loan with the possibility of paying interest. However, this only applies if you do not pay the entire bill amount. Interest is charged if you leave a balance unpaid. Another thing to remember about credit cards is that interest is charged monthly rather than annually. For example, interest may be levied at 3% per month or approximately 36% per year.
  • Credit limit: Every credit card has a spending limit that you cannot exceed. The credit card issuer may deny the transaction if you try to use the card after reaching the maximum limit. The credit card limit is determined by many criteria, including the type of credit card you have, your income and ability to pay, any other obligations you may have, your credit score, and your payment history. If your credit history is good, the credit card company may allow you to increase your credit limit.
  • Billing cycle: This is the time limit during which you can make purchases till the bill arrives. If you make purchases early in the process, you will have more credit time; that is, you will have more time until you have to pay for the transactions.
  • Minimum payment: There is a minimum amount that you must pay on your credit card If you don't do so, you might have to pay a fee. Any sum over the minimum amount can be carried forward, but you will have to pay interest on it.
  • Balance: The balance on your credit card is the amount you've spent but haven't paid back yet.


Difference Between Credit and Debit Cards

Although debit card and credit card may appear to be the same, they are not. When you use a credit card to make a purchase, you aren't spending any of your own money at the time. Instead, you're spending money from the credit card company, which you'll have to repay, maybe with interest. Alternatively, debit cards are connected to your bank account. When you use your debit card to make a purchase, the funds are promptly withdrawn from your account when the transaction is completed. Since the funds have already been deducted from your account, there is nothing to repay afterward.

As regards the credit score impact, debit and credit cards differ as well. Using a debit card does not influence your credit score as your bank account activity is not disclosed to the credit agencies; credit cards, conversely, might have a direct influence on your credit score. Making timely credit card payments might boost your credit score, but paying late can damage it. Similarly, having a fair balance compared to your credit limit might help your score; however, maxing out your credit card limits can hurt it. Another significant distinction between debit and credit cards is fraud prevention. Credit cards have more robust fraud safeguards than debit cards under federal law.

Conclusion

If used correctly, credit cards may help you establish credit. Paying your bills on time, keeping your balance low, and only taking out credit cards when necessary may all help you develop and maintain good credit. Moreover, remember that paying your credit card account in full each month is an excellent method to prevent interest costs. The user must use a credit card with caution and discretion. Living within your means and avoiding splurging on items you can't afford is always a bright idea. Further, if you can't pay off the entire balance on your card each month, you'll find yourself in a big problem, paying a lot of interest. So, make good use of your credit card.

References

  1. https://www.investopedia.com/how-do-credit-cards-work-5025119
  2. https://www.thebalance.com/what-is-a-credit-card-960233
  3. https://www.cnbc.com/select/what-is-a-billing-cycle/
  4. https://economictimes.indiatimes.com/wealth/borrow/why-paying-the-minimum-amount-due-on-credit-cards-can-make-you-fall-into-a-debt-trap/articleshow/71064891.cms?from=mdr
  5. https://www.investopedia.com/terms/c/credit-card-balance.asp

Latest Comments

Leave a Comment

200 Characters


Read Next

understanding-the-benefits-of-credit-card-balance-transfer-art

Things to know before applying for your first Credit Card

Credit cards have become the most important financial.....

smartways-article

The Best Credit Card Benefits That You Can Avail

In today’s age of digital rage, credit cards make for an indispensable part of wallet for daily transactions. 

Ways to keep track on your money well through a credit card article

5 Ways To Keep Track Of Your Money While Using A Credit Card

When used wisely, a credit card is the best resource......

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.