Before proceeding to anything else, let’s first get a clear idea as to WHAT EXACTLY A CREDIT CARD IS. A credit card is a card that allows its holder to use it to make payments for various good and services. The issuer of the card (usually a bank or a credit union) creates a mechanism via which the holder can make instant payments, but only on a promise to repay the amount to the issuer at a later date. Payments by a credit card are a kind of cash advance by the issuer to the holder. Usually credit cards have a printed or embossed bank card number, the name of the holder and the issuer and are made of plastic.
WORKING OF CREDIT CARDS
The card issuing companies contract with merchants so that they accept their cards instead of cash payments. The merchants also put up visual displays of the cards they accept. Some of the most commonly used credit cards are VISA, American Express and Master Card. The credit card is issued to the holder after the formalities regarding the opening of an account are complied with. Now the holder is free to use the card to pay for various goods and services, but as soon as the payment via a card is made, a promise between the holder and issuer of the card comes into existence whereby the holder promises to repay the issuer.
The merchants have an electronic verification system, using which he/she can verify that the card is authentic and the holder has sufficient credit to cover the purchase. Each month, the cardholder gets a statement from the issuer which mentions the purchases made with the same, any outstanding amount and the total amount to be paid to the issuer.
The card issuer usually doesn’t charge any interest on thus service is the payments are made each month regularly. However, if the holder does not make the repayment on time for a particular month, the interest is charged in whole of the outstanding amount. Interest rates generally vary from card to card and from issuer to issuer, however they may unexpectedly rise for a particular scheme if the holder defaults in payment for a long time.