What Are Credit Cards? How Credit Cards Work
How exactly does a credit card work. In today’s article, I would like to continue the series on financial education. The topic of today’s article is How Credit Cards Work. What are credit cards? How do they work? How do credit card companies make money?
And the most important question: Should you use a credit card yourself or not? Are there any advantages and disadvantages? Come, let’s find out.
How Do Credit Cards Work? How exactly does a credit card work
Let’s understand with an example. Suppose you’re studying in school and suddenly a pandemic strikes. All your studies are done through online classes. But to attend these online classes, you need a smartphone. And you don’t have a smartphone.
You urgently need to buy a smartphone. But you don’t have the money to buy it in your bank account. But you don’t have the money in your bank account to buy it. So you inquire with your guardians to exchange a few cash to your bank account. However, it will take 2-3 days to transfer the money. But you have to buy a smartphone tomorrow because your class is tomorrow. what should you do
In such a situation, you can use a credit card to buy a smartphone immediately. And you can pay for it later. So a credit card is basically a card that helps you buy things instantly. But you can actually pay for it later, at the end of the month.
Credit Cards vs. Debit Cards: Key Differences in How exactly does a credit card work
Usually, you have money in your bank account. You withdraw cash from your bank account and pay with cash.The second option is to use a debit card that is linked directly to your bank account. When you pay with a debit card, the money is withdrawn from your bank account and the other person gets it.
But what happens with a credit card is that the bank pays you. Whatever you’re about to pay. And at the end of the month, you pay the bank for the entire month’s expenses. You can spend more than a month paying the bank. But then the bank charges a high interest. Like in a loan. So basically, a credit card is like a mini-loan.
How Credit Card Payments are Processed: A Detailed Look into How exactly does a credit card work
More often than not, after you take out a cash credit, you get a cash credit. you get a cash loan. Here, however, the bank gives you a plastic card instead of a loan. With your name and unique number. In order to uniquely identify this card. It has an expiration date.
How is the payment being processed? There are some payment processing companies like Visa and Mastercard. These are the two most popular companies. Basically, they provide the infrastructure behind so that credit card transactions can happen. The bank that issues the credit card to you is different from Visa or Mastercard. Both companies are payments companies.
Credit Card Security: Protecting Your Information in the Context of How exactly does a credit card work
And there is a magnetic strip behind the credit card and the CVV number is also written on it. It is exceptionally vital to keep it secure and mysterious. Otherwise, you may be scammed.
Understanding Credit Limits in How exactly does a credit card work
Now, every credit card has a credit limit. How much money can you spend on that credit card without returning the money to the bank? If there is a limit of Rs 30,000, you cannot spend more than Rs 30,000 on that credit card.
What Determines Your Credit Limit in How exactly does a credit card work
What is the credit limit? It depends on the bank which card you bought.. And the bank checks your salary. Based on your credit score, it judges how much credit limit should be set. If the bank sees that you have a high salary, and you can afford to return more money to the bank, the bank trusts you more. That’s why your credit limit is higher.
The Importance of Your Credit Score in How exactly does a credit card work
Now, the credit score is also a very interesting thing. If you don’t pay your credit card and loan payments on time, the bank will feel that it is risky to give you money. They don’t know when you’ll be able to return the money. The risk that the bank has to face when giving you a credit card or a loan, to judge this risk, the bank has created a grading system.
The bank grades you. If your credit score is between 750 and 900, then it is a very good credit score.
Benefits of Using Credit Cards: Exploring How exactly does a credit card work
Implies that the bank can believe you and the chance is very good. Based on your ancient track record, your credit score is taken out. And based on that, the bank judges whether the credit limit should be higher or lower for you. In fact, whether you should give a credit card or not.
What is the benefit for you if you use a credit card? I said an advantage at the start of the article. If you want to buy something now but you want to pay for it at the end of the month, then it is beneficial for immediate expenses.Another huge advantage is that employing a credit card is less unsafe than a charge card.
Credit Card Rewards and Perks: Understanding How exactly does a credit card work
If there is fraud with you, in the case of a debit card, the money will go straight from your bank account. But in the case of a credit card, your bank, your credit card issuer, will pay on your behalf. And if there is fraud, they can investigate and see. And if there is actually a fraud, they can return your money.
In India, if there is fraud with your credit card, the customer’s liability, that is, your liability is zero, if you report that fraud within three days. So basically, the bank is taking the risk of paying somewhere. The third big advantage is the rewards you get when you use a credit card.
Choosing the Right Credit Card: Tips Based on How exactly does a credit card work
Now, different banks have different reward systems for different credit cards. In some, you get cashback. In some, you get big discounts. In some, you get insurance. For example, if you have an accident, you get insurance for that. It depends on your credit card what benefits you get from using it. But today, in almost every credit card, there is some kind of a reward point system. You can collect points and then exchange them to buy something big.
Factors to Consider When Choosing a Credit Card: Insights into How exactly does a credit card work
Now, which credit card should be used? To do this you need to pay attention to three things. First, the bank that is issuing your credit card. The system of reward points, the fees charged by the bank, and the hidden fees, are mostly decided by the bank.
Second, which credit card you are using is being offered by the bank. In some high-level credit cards, you get more rewards. You get better insurance and more points. But often, their fees are also higher.
And the third thing to keep in mind is which payment network is used in that card. As I said, Visa and MasterCard are the two most common payment networks. But apart from this, there are American Express, Diners Club and Rupee. Although Visa and MasterCard are common nowadays, the difference between the two is undeniable. But if you look at American Express, the comparison between the two is very different.
The Impact of Payment Networks on Credit Card Benefits in How exactly does a credit card work
Because most places accept Visa and MasterCard. American Express is not accepted. But the good thing about American Express is that there are a lot more rewards. As I said, banks mostly decide the system of reward points. But to some extent, these payment networks also decide what kind of rewards will be given to our network. What benefits will be given to the credit card holders.
Although, an interesting thing to note is that other MasterCard cards of MasterCard cannot be issued in India now. Because there were guidelines that MasterCard did not follow. And the RBI said that people can use the existing MasterCards. But other MasterCards cannot be issued. Until the MasterCard company complies with these guidelines.
How Banks Profit from Credit Cards: The Financial Mechanics of How exactly does a credit card work
But overall, the different banks, this is also an interesting thing. Everyone uses a different proportion of MasterCard, Visa and American Express. In this chart, you can see which different banks use which payment network more. There are some banks like RBL and Yes Bank that only accept 100% Mastercard. On the other hand, some banks like Kotak only give 100% Visa.
Talking about banks, let’s look at things from the perspective of banks. How do these banks earn money from credit cards? The simplest way to earn money from banks is by charging annual fees. Some credit cards require you to pay an annual fee to use them. Banks also have other payment methods.
The Hidden Costs and Fees of Credit Cards: Insights from How exactly does a credit card work
On the off chance that you do not pay on time, you’ll be charged a late charge. In case you need to pull back cash from a credit card, you have to pay an extra payment of 2-5%. But you will be surprised to know that a big part of these banks’ earnings is actually people’s stupidity. A lot of people don’t pay their credit card bills on time at the end of the month. Because of this, banks charge a very high interest rate on them. And this interest rate is so high that it can go up to 30% if you calculate it in a year. Which is 2-3 times higher than the loan interest rate.
The Global Perspective on Credit Card Usage: How exactly does a credit card work
And by charging such a tall intrigued rate, banks gain a parcel of cash and individuals got to lose their cash. Each individual who employs a credit card, if they start paying their payments on time, a big part of the profits of these banks will be lost. This is the reason why in some countries, credit cards are not so popular. In many European countries, credit cards are not used much. Because people’s mindset is such that they always pay on time.
Alternative Financial Solutions and Their Impact: Insights from How exactly does a credit card work
They never purchase anything when they do not have cash to purchase it. Individuals do not purchase things on EMI in Europe. So credit cards are not so popular in Europe as compared to countries like India and the USA. Where people are used to buying things when they don’t have money to buy them. This is why in European markets, some alternative banks like N26 and Revolut are becoming more popular. They offer some functions of credit cards. These banks give their debit cards. In some debit cards, annual fees are charged. And those debit cards offer you some rewards. Like insurance or something. But the security that you simply get in a credit card isn’t advertised here.
The Future of Credit Cards: Trends and Innovations in How exactly does a credit card work
So some functions of credit cards are being offered here. It is very interesting to see that with time, the advantages that credit cards offer, in the future, the companies are trying to offer those advantages in different ways. And the disadvantages of credit cards can be reduced. And when the competition between the companies increases, the advantages will increase and the disadvantages will decrease.
Conclusion: Deciding Whether to Use a Credit Card Based on How exactly does a credit card work
So the question is whether you should use a credit card or not. The reply to this can be exceptionally straightforward, companions. In case you pay your credit card bills on time, then you can use it. On the other hand, if you use a credit card to buy things that you can’t afford, if you buy something thinking that you don’t have money right now so you can buy it on a credit card but after 30 days, you’ll be able to arrange the money, then don’t use a credit card. You can fall into a debt trap.
Evaluating Credit Card Rewards and Fees: Practical Advice from How exactly does a credit card work
Third, if you’re looking for rewards while buying a credit card, then evaluate the situation. The different fees that you’ll pay for using the credit card. Usually, there are 2-3% processing fees. And the rewards that you’ll get in return. Will they actually be worth it or will you incur a loss? So you’ll have to calculate a bit.
Final Thoughts on How exactly does a credit card work
But fourth, if you’re afraid while making an online payment or while making a payment anywhere that you might get a fraud, then to maintain safety, use a credit card. I hope you found this article informative.