A credit card is a facility offered by the bank, which allows you to spend money first and pay it later. You can make online or offline payment by credit card. Do you know how a credit card works?
Let’s try to find the answer to this question.
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On what basis do banks offer credit cards?
It is actually a contract of the transaction between two parties. When you apply for a credit card, the bank checks what is your ability to borrow and repay it.
If you are eligible to repay the loan amount after taking the loan from the bank, then the banks issue you a credit card.
You actually borrow money from the card-issuing bank by spending the amount on the credit card, which you have to repay in due time.
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60 days to repay the money
If you do not pay the credit card bill on time, then you have to pay a fine on it. At the end of every billing cycle, you must pay the minimum bill amount.
Between the credit card bill generated and the purchase, you get a loan-free period of 50-60 days.
If you pay the full credit card bill on time, then you do not have to pay any penalty, your credit score also gets better.
If you do not pay the credit card bill on time, then you get a deposit of interest.
Sometimes there is a late payment on the outstanding balance and the finance charge.
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Credit Card Essential Points
- Merchant or Seller: They use point of sale (POS) terminals. At this terminal, customers swipe the card and pay the merchant.
- Payment Gateway: This is the online version of POS. If you do online shopping or bill payment, then you pay only through the payment gateway. This authorizes your payment in online shopping. (PayU Money or Very Sign etc.)
- Payee: This is the bank or NBFC which pays the merchant against the payment made by credit card. The POS terminal provides only the receiving institution.
- Association or network: The payment processing network actually fulfills all the formalities related to the process of payment made by credit card. This includes work such as process, authorization, and collection of payments. Weise, MasterCard, American Express, etc. are such networks.
- Payment Processors: It is the process of collecting all the data and sending it to the network. First, the correct network is identified in it. For this, the first four and last four digits of the credit card are useful.
What is the working procedure of a credit card?
- When you swipe a credit card at a POS terminal, the first message is sent to the merchant through a network connection. After this, a message is sent to the card-issuing bank to authorize the payment.
- After this, the card-issuing bank checks whether such a loan amount is available in the customer’s account.
- If the money is available in the customer’s credit account, then the bank authorizes this transaction.
- As soon as the transaction is authorized, the POS terminal shows the approval message, and a slip is printed. The merchant deposits this slip in the bank account, after which the payment arrives in his bank account.
Since many transactions take place during a day from a single POS terminal. You can also shop multiple times throughout the day with your credit card.
Accordingly, a transaction number is given to track every transaction. There is a fee for each party involved.
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