How The Credit Card Works?

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Every body is using credit card these days. It is the most conveniently carried method of payment; people are spared from the inconvenience of stuffing currency notes into their wallet. They also do not have to take the pains of counting currencies before making any purchase. All you have to do is to handover the credit card to the service provider/shop owner, who will swipe the card on a machine and your transaction is over. This seems to be so easy to use but it has taken rapid advancement in technology to make it possible. It is made entirely of plastic with a chip of metal fitted inside. This chip is the most important portion of the entire assembly, making transaction through credit card possible. This chip contains all the required information pertaining to the bank, which will be providing the credit through that credit card. You, as a credit card, holder is being offered credit line with a predefined credit limit by the bank through the credit card. You can avail this credit either by using credit card in an ATM machine or let it swipe on the machines installed on various shops. These actions will send intimation to the bank to pay the requested money on your behalf. Now bank quickly makes money once the transaction is over, by taking a small percentage as transaction money.

Your transaction amount will be reduced from your monthly credit limit generally with in 72 hours after transaction. Now you will have a period of 45 days to 2 months to pay back your total balance with out any rate of interest charged to you. Once that payment period is over, rate of interest will be charged and will be added to your balance. This late payment amount is the greatest source of earnings for the banks because quite a few people end up defaulting on their payments. And then every month a statement is sent by the bank asking for a minimum payment to be done, which is a fragment of the total balance. This minimum monthly payment will lead to complete payment over a period time. This minimum monthly payment adds up to a total which is far more than your actual balance.

So this is how credit card works.

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