Introduction of Technical and Financial working of credit cards

A credit card functions as an unsecured borrowing arrangement initiated by a card issuer, offering a predetermined credit limit. It permits transactions both online and offline, offering the option to repay the borrowed sum either entirely or in smaller increments. Differing from conventional installment loans like personal or auto loans, credit cards operate on a revolving credit structure, allowing for repeated borrowing once prior balances are cleared. Beyond facilitating transactions, credit cards offer incentives in the form of rewards based on expenditure. Furthermore, employing credit cards responsibly aids in establishing a favorable credit record, underscoring the significance of prudent financial practices.

Distinguishing Debit Cards from Credit Cards

For newcomers to the world of finance, telling apart a credit card from a debit card can appear perplexing initially. Despite their similar appearances, these cards function differently. Prior to exploring how a credit card works, it’s essential to understand the differences between a debit card and a credit card.

Debit Card: A debit card operates like a plastic form of currency, enabling transactions by allowing users to withdraw cash or transfer funds directly from their account, without incurring any interest charges. Essentially, you utilize the funds available in your own account.

Credit Card: A credit card, also issued by a bank or non-banking financial institution, grants you the ability to borrow funds for purchases. In return, these entities impose interest charges in case of non-payment or delayed payment for the goods and services you’ve acquired.

Everything You Should Be Aware Of Regarding Credit Cards

I. Know Your Credit Card Details:

1. Be aware of all information on your credit card, including name, CVV, and symbols.
2. Critical information on a credit card comprises a distinct number, the name of the cardholder, expiration date, issuer emblem, card network, and a symbol indicating contactless payment capability.
3. The rear side of the card holds both the CVV code and a magnetic strip.

II. Financial Working of a Credit Card:

1. Credit card transactions involve borrowing from the card-issuing company.
2. Repayment is required by a specified due date to avoid interest charges.
3. If the entire sum isn’t settled during the period exempt from interest, interest will be levied.

III. Technical Working of a Credit Card:

1. Important terms to understand in the realm of payment processing encompass Payment Gateway, Acquirer, major card networks such as Visa and MasterCard, Merchant, and Credit Card Issuer.
2. Payment Gateway authorizes online credit card transactions.
3. Acquirer processes credit card transactions on behalf of the merchant.

IV. Working of a Credit Card at a Retail Store:

1. At the point of sale, the cashier uses a Point of Sale (POS) machine to swipe or insert the card for payment.
2. Personal Identification Number (PIN) may be required for authentication.
3. The point-of-sale (POS) machine scans the magnetic strip of the card, transmits data to the bank that issued the card, and finalizes the authorized transaction.

V. The operational mechanism of a credit card in facilitating online transactions:

1. When completing an online purchase, ensure to input all necessary card information: card type, number, expiration date, CVV, and the name of the cardholder.
2. Information is sent to the bank via the payment gateway.
3. Transaction completion frequently necessitates the utilization of OTP (One Time Password) authentication.

VI. Important Terms:

1. Credit limit refers to the highest permissible expenditure, decided based on an individual’s creditworthiness and past financial behavior.
2. Minimum Payment: The least amount required to be paid before the due date.
3. Interest: Charged on unpaid amounts, applicable monthly.
4. Billing Cycle: Fixed period for making purchases before generating a bill.

Conclusion

A credit card allows you to make purchases on credit, essentially taking a loan for the amount spent. Clearing the entire bill each month exempts you from paying interest; however, failure to do so results in interest charges on the remaining balance. The intricacies of credit card operations may seem intricate, but the seamless experience is facilitated by technologies from Visa and MasterCard. Employing a credit card wisely can be a beneficial strategy for enhancing one’s credit rating and efficiently handling financial affairs.

Frequently Asked Questions (FAQs)

1. How does a credit card work technically?
   • A credit card functions by enabling individuals to buy items within a predetermined credit threshold. The cardholder borrows money from the issuing bank to complete transactions.
2. What is the role of the magnetic stripe or chip on a credit card?
   • The magnetic stripe or chip contains essential information about the cardholder and the account. It facilitates secure and accurate transaction processing when the card is swiped or inserted into a card reader.
3. How do credit card transactions get authorized?
   • When a credit card is used, the merchant sends a request to the issuing bank for authorization. The bank examines the credit availability, confirms the transaction, and then either grants or rejects the request.
4. What is the significance of the CVV (Card Verification Value) on a credit card?
   • The CVV is a security feature, usually a three-digit code, that adds an extra layer of protection during online and phone transactions. It helps verify that the person making the purchase physically possesses the card.
5. How does the billing cycle work?
   • The billing cycle refers to the span from one credit card statement to the next, typically lasting around a month. Within this period, cardholders can make purchases, and once the cycle concludes, a statement is generated summarizing all transactions made.
6. What is the minimum payment, and how does it affect interest charges?
   • The smallest payment required from a cardholder to maintain an up-to-date account is known as the minimum payment. Nevertheless, solely paying this minimum amount can incur interest charges on the outstanding balance, possibly causing prolonged indebtedness.
7. How is interest calculated on credit card balances?
   • Interest is typically calculated based on the average daily balance over the billing cycle and the annual percentage rate (APR) set by the credit card issuer.
8. What happens if I miss a credit card payment?
   • Missing a credit card payment may result in late fees, increased interest rates, and a negative impact on your credit score. It’s crucial to make at least the minimum payment by the due date.
9. How do credit card rewards and cashback programs function?
   • Credit card rewards and cashback initiatives entice users to utilize their cards by granting them points, miles, or cash rebates on qualifying transactions. These rewards are flexible, allowing redemption for a range of benefits including travel, merchandise, or statement credits.
10. What measures can I take to safeguard against credit card fraud?

• To prevent credit card fraud, monitor your statements regularly, use secure websites for online transactions, safeguard your card information, and report any suspicious activity to your credit card issuer promptly.