How does a credit card work

Rightly called as revolving credit, the working of a credit card takes place in a cyclical pattern. A revolving account is created by the card issuer for the consumer along with grant which provides a line of credit so that the user can borrow money from the bank and pay it wherever needed.In one complete credit card transaction, a set of steps is involved which are executed serially.

The customer, merchant, the bank that has the merchant’s account, the credit card network and the issuing bank are five entities involved in the transaction. When you make purchases using your credit card, firstly, the merchant checks whether the amount you are paying would be approved and the credit limit hasn’t been exceeded. This is done by sliding the credit card through an electronic device which has been connected across a network which approved the payment. Once it is confirmed that the credit limit hasn’t exceeded, a pair of receipts is printed for you to sign, out of which, a copy is kept by the merchant and the other is given to you.

The receipt is then deposited by the merchants with their banks and the bank credits the specified amount in their accounts. The transaction is then sent electronically by the bank to the credit card network involved like Visa or MasterCard. The network credits the amount in the bank and continues the transaction further by charging the bank or financial institution which has issued the credit card.

A bill for the purchase amount is then sent by the issuers to their card holding customers. If the complete amount is paid by the card bearer in the stipulated time, the bank doesn’t charge an interest or any other finance charges. This is the cyclical and serial format in which any credit card transaction is executed.