How do credit cards function?
Credit cards are used by a lot of individuals to shop on credit. It can be referred to as plastic money and famous all around the world. Moreover, it can be utilized for making payments both online and offline. When you swipe the card after purchasing services or products, the amount gets credited to the business owner’s account. It is an advanced technology and numerous players are involved behind the working of the entire credit card system. The credit card functions in various ways for various parties and the cardholder. Let us discuss how it functions for each in this blog.
How do credit cards work for various parties?
There are several members involved in the functions of the credit card system. They are as follows:
- Payment processors: It takes complete responsibility for collecting the information and transferring it to the associated network. Credit cards consist of numbers and the last and first digits denote the right network.
- Network or association: The payment processing network that collects details from the processors, permits and collects the costs for the purchases. Some of the best examples are American Express, MasterCard, Visa, etc.
- The Acquirer: Acquirer is the financial institution or the bank that progresses credit card payment along with the merchants. It offers the Point of Sale machines to the sellers or merchants.
- Credit card issuers: It refers to the credit card companies or banks that provide credit cards, get the monthly bills as well as interact with customers.
- Payment gateway: The online version of Point of Sale machines is the payment gateway. It authorizes the acquisitions that are performed utilizing the credit card online.
- Sellers or merchants: They utilize the Point of Sale tools to swipe the customer’s credit cards to obtain their money.
How do credit cards work for the credit card holder?
After applying for the credit card, you need to wait for a few days for verification. The credit card provider would analyze whether you are eligible to hold a credit card or not. If they find you eligible, then they will issue a card according to the amount you are earning. The Credit Card Company or bank will decide the credit limit for the cardholder. The card issuer sanctions the credit card only when the person has sufficient credit to make the purchase.
After signing their terms and conditions, you will obtain the credit card. You can utilize the card to make payments online or offline on credit. Whenever you use the card, it means you are borrowing from the bank or credit card company. The billing cycle will be either whenever you use the entire credit limit or just a part of it. If in case, you are exceeding the credit limit, then you are charged a penalty. After every billing cycle, you have to repay the sum you have borrowed to the lender. Fixed interest will be charged if you are paying within the free credit period. Though you are paying the full money or part amount, you have to pay the fixed interest amount.
In most cases, the credit card providers mention the minimum amount you have to pay on every billing cycle. If you do not pay, you will be considered as a defaulter.
If in case, the cardholder is paying the entire amount, there is no need to pay interest. If you do not repay or pay only the specified minimum amount, you have to pay interest in the unsettled balance and also when you may make new purchases. Whenever you are using the card, the card provider charges interest. They will charge until you clear the entire pending balance.
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