If you would ask me, about my best learning experience during college life, I wouldn’t hesitate to tell you endless stories about Sri Kaka, a small tea shop owner outside our college, managing all finances so well, he had a big house, a car, name it he had it all, every student who would visit his stall for tea used to get a piece of free advice about finance worth a million, no reason why his stall was so crowded all the time, it was not only his tea but his golden advice. For me, his best advice was on instant credit card. Knowing about what a credit card is and how it works, not only helped me in getting financially independent but also to feel more financially secure. As you are reading this article, let me use it as an opportunity to pass on the golden knowledge to you, so let’s start:
What is a credit card?
A credit card is one of the facilities offered by banks and financial institutions, to make the life of their customer easy and hassle-free by providing short-term interest-free credit for 45-60 days depending on the issuer, without any mortgage within a pre-approved credit limit. Factors such as income and credit score are used by the credit card issuers to determine the credit card limit for each credit cardholder.
A credit card contains the following information
- Card holder’s name
- Credit card number
- Expiry date
- CVV code
- A signature, etc.
Whenever you swipe the card, for making a payment, the amount is deducted from your credit card limit and not from your bank account, at the end of the month, a detailed list with your monthly credit card statement is sent to you by the issuer. Also, every time you swipe the card, you are notified about the current outstanding on your card, along with credit still available to you. Isn’t it amazing, now let’s discuss how does a credit card works :
How does a credit card work?
Let’s say you have a SunTrust bank card but before using the credit card you will have to activate it. Do you know how to activate SunTrust’s credit card? Let’s say you have SunTrust bank card but before using the credit card you will have to activate it. Do you know how to activate SunTrust credit card? Let’s understand how a credit card works by using a real-life illustration, suppose Mr. A goes to a grocery shop to buy monthly ration and uses his credit card to do the payment, he could do it in two ways:
- Mr. A slides his credit card into the card reader to make payment :
- Mr. A-scans his credit card to make payment
In both ways, the necessary details such as card number will be shared with the merchant’s bank, the merchant’s bank would connect from the credit card network to process the information and get the transaction authorized, Mr. A’s card issuer would respond to the request by sharing information regarding if the transaction is legitimate and Mr. A has enough credit limit available, based on the information the transaction would either be approved or revoked owing to not sufficient balance available or if any fraudulent activity is suspected.
(A)If the transaction gets approved, Mr. A will receive a statement at the end of the month for his credit containing regards regarding the total amount due, the minimum payment due, and when his payment is due, there could be two cases in which Mr. A could make the payment:
- Mr. A will pay the full amount due on or before the due date: If Mr. A pays the total amount on or before the due date, he will have to pay zero or no interest.
- Mr. A will pay the minimum amount due on or before the due date: If Mr. A pays only the minimum amount due, then on his payment he will pay on the remaining amount plus interest.
(B)If the transaction is not approved by the card issuer, there could be the following two reasons for the same:
- Mr. A’s credit limit has been exhausted or does not have sufficient balance for the transaction.
- The card issuer may detect fraudulent activity, this does not always signify that the information has been stolen but it could also mean that Mr. A has made unusual purchases, in such a case Mr. A’s card issuer may cancel his card and contact him.
As the world is getting more competitive day by day, you need to switch some of your hard work with smart work to become financially independent and secure just like Sri Kaka. You got it right, it’s time to enjoy your financial life to the fullest by being a smart credit cardholder with a better credit score.