How Credit Card Works

You open the wallet and everyone has at least 2-3 credit cards, that’s an indication of the extensive use of the credit cards all over the world by varied section of people. Ever wondered how it works –both financially and technically!!! Let’s have a look into the details

For eg: the front side of the credit card looks like

1.is the issuing issuing bank
2.is the credit card number
3.the card holder name
4.card brand
5.expiry date of the card

The backside of the card would have a

1.magnetic stripe
2.signature strip
3.CVV

When an individual/organization applies for a credit card, upon approval, the bank issues a credit card, the holders name is coded on the card as marked in the diagram above, along with the issue date and the expiry date.

It entitles the user to buy goods and services from stores or online up to a limit (as per the users choice of the credit card) and make the payment depending on he policies described for that particular card.

Its kind of a virtual transaction, where user doesn’t really pay in cash while purchase, but borrows an amount from the bank and pays the issuer/bank this amount at a later stage .

An electronic verification is done when the card is swiped in the machine , which reads the magnetic strip for authorization and links to the merchant’s acquiring bank and prompts for the PIN from the card holder. The verification can be done for online payments or over the phone as well, which is secure and prompts for user details related to the card.

Once the security details of the card are verified, it generates a receipt which needs the card holder’s signature, which confirms the transaction for the merchant. The issuer is then liable to pay that amount to the merchant.

Generally at the end of the month a credit card statement is generated, that will be sent to the card holder with details of the transaction made and a timeline or due date given whereby he has to credit the amount to his credit account.

This amount can be a net total of his transactions made or a part of it to avoid interest or late fee (as described in the card’s policies and guidelines) , payment of which enables the user to avail the credit card.

Failure of this payment would still the enable the usage of the credit card, however with a penalty, I.e., the late fee and a huge interest.

For the safe interest of the users, it’s always advised to keep a track of the monthly statements sent by the bank to ensure no unknown transactions are made by purpose or accidentally.