Posted on: May 21, 2024 Posted by: admin Comments: 0
How Credit Cards Work?

Credit cards are essential tools in today’s financial world, providing convenience and financial flexibility. However, understanding how they work is crucial to leveraging their benefits and avoiding pitfalls. This comprehensive guide will explain the workings of credit cards in detail, covering everything from their basic mechanics to their sophisticated features.

Mechanics of Credit Cards

Credit Limit

The credit limit is the maximum amount a cardholder can borrow. This limit is set by the card issuer based on the cardholder’s creditworthiness, which is determined by factors such as credit history, income, and existing debt.

Making Purchases

When a purchase is made with a credit card, the card issuer pays the merchant on behalf of the cardholder. This amount is then added to the cardholder’s outstanding balance. Each transaction reduces the available credit until the balance is paid down.

Billing Cycle

The billing cycle is the period during which transactions are recorded and ends with the generation of a statement. Billing cycles typically last about 30 days. At the end of the cycle, the cardholder receives a statement detailing all transactions, the total balance, the minimum payment due, and the due date.

Minimum Payment

The minimum payment is the smallest amount that must be paid by the due date to avoid penalties and keep the account in good standing. This amount is usually a small percentage of the total balance or a fixed dollar amount, whichever is higher.

Interest and APR

The Annual Percentage Rate (APR) is the interest rate charged on any outstanding balance not paid in full by the due date. There are different APRs for purchases, balance transfers, and cash advances. Interest is calculated daily and compounded, meaning that the interest charged each day is based on the balance, including any previous interest.

Grace Period

The grace period is the time between the end of the billing cycle and the payment due date. During this period, no interest is charged on new purchases if the balance is paid in full. However, if the previous balance is not paid off, new purchases may accrue interest immediately.

How Credit Cards Work in India?

In India, credit cards operate similarly to those in other countries, with some regional differences:

  1. Issuance: Major banks like HDFC, ICICI, SBI, and others issue credit cards based on the applicant’s credit history and income.
  2. RBI Regulations: The Reserve Bank of India (RBI) regulates credit card operations, ensuring fair practices and transparency.
  3. Rewards Programs: Indian credit cards often come with rewards programs tailored to local spending habits, such as cashback on fuel, dining, and travel.
  4. EMI Options: Many Indian credit cards offer the option to convert large purchases into Equated Monthly Installments (EMIs) at low interest rates.
  5. Interest Rates: Interest rates on unpaid balances typically range between 24-48% per annum, calculated daily.

How Does Credit Card Payment Work?

Credit card payment involves several steps to ensure your account remains in good standing:

  1. Billing Cycle End: At the end of the billing cycle, the card issuer generates a statement detailing all transactions and the total balance due.
  2. Payment Due Date: The statement will specify a due date by which the payment must be made.
  3. Minimum Payment: The statement will also indicate the minimum payment required to avoid late fees.
  4. Payment Methods: You can make payments online through the card issuer’s website, via mail, over the phone, or in person at a bank branch.
  5. Interest Calculation: If the full balance is not paid by the due date, interest is charged on the remaining balance, which continues to accrue daily until paid off.

How Does Credit Card Work Exactly?

A credit card works by allowing you to make purchases and borrow funds up to a specified limit. Here’s a detailed breakdown:

  1. Approval and Issuance: You apply for a credit card, and upon approval, the card issuer assigns you a credit limit based on your creditworthiness.
  2. Making Purchases: When you use the card for purchases, the issuer pays the merchant, and the amount is added to your outstanding balance.
  3. Monthly Statements: You receive a monthly statement listing all transactions, the total balance, the minimum payment due, and the payment due date.
  4. Payments: You can pay the full balance, the minimum payment, or any amount in between. If you don’t pay the full balance, interest is charged on the remaining balance.
  5. Interest Charges: Interest accrues daily on any unpaid balance and is added to your total owed amount.

क्रेडिट कार्ड बिल्कुल कैसे काम करता है?

क्रेडिट कार्ड आपको खरीदारी करने और एक निर्दिष्ट सीमा तक धन उधार लेने की अनुमति देता है। यहां विस्तृत विवरण है:

  1. स्वीकृति और जारी करना: आप क्रेडिट कार्ड के लिए आवेदन करते हैं, और स्वीकृति पर, कार्ड जारीकर्ता आपकी क्रेडिट योग्यता के आधार पर आपको एक क्रेडिट सीमा आवंटित करता है।
  2. खरीदारी करना: जब आप कार्ड का उपयोग करके खरीदारी करते हैं, तो जारीकर्ता व्यापारी को भुगतान करता है, और राशि आपकी बकाया शेष राशि में जोड़ दी जाती है।
  3. मासिक विवरण: आपको मासिक विवरण प्राप्त होता है जिसमें सभी लेन-देन, कुल शेष राशि, न्यूनतम भुगतान देय और भुगतान की अंतिम तिथि शामिल होती है।
  4. भुगतान: आप पूरी शेष राशि, न्यूनतम भुगतान, या बीच में कोई भी राशि का भुगतान कर सकते हैं। यदि आप पूरी शेष राशि का भुगतान नहीं करते हैं, तो शेष राशि पर ब्याज लगाया जाता है।
  5. ब्याज शुल्क: किसी भी बकाया शेष राशि पर दैनिक आधार पर ब्याज लगता है और आपकी कुल देय राशि में जोड़ दिया जाता है।


Understanding how credit cards work and how to use them effectively can significantly enhance your financial management. Credit cards offer convenience, security, and a host of benefits when used responsibly. By selecting the right card and managing it well, you can enjoy the advantages while building a strong credit history.

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