How Does a Credit Card Work?
Credit cards are a quick and convenient way to pay for any kind of purchase. They are referred to as “plastic money” and are accepted universally online and at shops. A credit card is attached to a credit account with a financial institution, and when you use the card, you are borrowing from the issuer. You can use a credit card to purchase items or services from a merchant who accepts credit cards. Let us see how a credit card works and what happens when you use your credit card online or at a retail store.
What Is a Credit Card?
A credit card is a physical card that you can use to pay bills, buy items, or sometimes withdraw cash. In simple words, a credit card is a kind of small-term loan. When you open a credit card account, the card company offers you a set credit limit: the amount of money the company allows you to use to pay your bills. Your available credit reduces as you use the card and then pay back what you spent to the card company.
The details shown on the credit card are as follows:
- 16-digit card number
- Expiry date
- Name of the cardholder
- Billing address
How Do Credit Cards Work?
When you use a credit to purchase from a retail store or online, your details are immediately sent to the merchant’s bank, and the bank gets authorization from the card network to authorize the transaction. The card issuer will verify your information to approve or reject the transaction.
If the transaction is approved, the merchant gets the payment, and the transaction amount reduces the available credit limit. The card issuer will send you a detailed statement of all the transactions in the month at the end of the billing cycle, including the previous balance, current balance, due date and minimum amount due.
How Does a Credit Card Work at a Retail Store?
Below is the process that occurs when you swipe a credit card at a retail store.
- Authorization – The shopkeeper swipes your card and asks you to enter the PIN. The machine reads the chip and sends the information along with the PIN to the issuing bank. The bank, via the network, will check if you have sufficient balance and then authorize your transaction.
- Batching – Once the transaction is approved, the machine prints receipts, a copy of which is given to you, and the retailer retains one. All receipts are collected by the merchant and sent to the acquirer’s bank to receive the payment.
- Clearing – The acquirer bank sends a request to the issuer bank via the network. The issuer bank pays the balance to the acquirer bank after deducting the appropriate fees.
- Funding – After getting the payment, the acquirer bank deducts the merchant fees and pays the merchant.
You will reflect your purchase in your following credit card statement.
How Does a Credit Card Work Online?
When you use your credit card for online payment, such as SBI credit card payment or standard chartered credit card payment, the e-commerce store will ask for the following details:
- Your 16-digit credit card number
- Name of the cardholder
- Billing address
Once you click on Pay, the above information will be sent to your bank via the payment gateway. The bank then sends a One Time Password (OTP) to your registered mobile number or email ID. Once you enter the OTP, the transaction is authenticated and completed.
Terms Related to Credit Card
These are some of the terms related to credit cards that you must be aware of:
- Interest – If the credit card bill is not paid entirely, interest will be delivered on the outstanding balance compounded every day.
- Credit Limit – Every credit card has an upper limit above which you cannot spend. If you use your card over this limit, the card issuer may reject the transaction.
- Billing Cycle – Typically, credit cards have a monthly billing cycle that is reflected in the statement. All credits and debits will be shown in this statement.
- Minimum Payment – If you cannot pay the amount due, the bank gives you the option to pay a minimum amount which constitutes the EMIs payable for the period and other additional charges.
- Balance – This is the amount you have spent through your credit card but have not paid back yet.
Whether you need to make an SBI credit card payment, standard chartered credit card payment or any other bank’s credit card payment, you can complete it in a few easy steps via the MobiKwik website or app. Online credit card bill payment via MobiKwik offers customers a hassle-free experience, convenience and many rewards.