How do Credit Card Work?
Credit Card is a loan provided by the credit card issuer to individuals that they use for everyday purchases like Pay bills, Shopping online, or in stores purchases.
When you use your credit card to pay for your purchases in any store or online, the details are sent to the shopkeeper’s bank. This bank then checks with the credit card network for approval. Finally, your bank that issued the credit checks your information and authorizes or declines the transaction. If the transaction is approved, then the store receives the money and the amount spent on purchase is deducted from your credit limit. At month-end, you’ll receive a card statement showing your transactions, previous balance, new balance (current amount owed), minimum amount due, and the payment due date.
Credit card offers an Interest-free period that is up to 50 days to repay your due amount without interest. This includes:
- Billing cycle: 30 days to receive your bill.
- Grace period: Around 20 days after the billing cycle to make the payment without interest.
Interest-free period not applicable in case of cash withdrawals or if you have any previous unpaid balance.
Always remember to pay back the credit card amount by the due date. If you are unable to pay the credit amount on time you can also choose to convert the amount into monthly installments (EMIs) to spread the repayment. If you Fail to repay by the payment due date or minimum amount will result in interest charges and penalties.
Example of credit card, Suppose you have purchased a smartphone for ₹10,000 on your credit card. The purchase is approved, and your credit limit reduces by Rs. 10,000. As long as you pay back the entire ₹10,000 within the interest-free period (usually around 50 days), you won’t incur any extra charges. However, if you only pay the minimum amount due let’s say ₹1000 and carry the remaining outstanding amount ₹9000, then interest will be charged on the outstanding amount from the next billing cycle.
The best part of the credit card is that money is not deducted from the bank account it is deducted from the credit card limit. Additionally, you will find different types of credit cards offered by different institutions, you must wisely choose which credit card suits your spending habits.
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