How Credit Card Works – Everything you need to know about Credit Card

Find out How Credit Card Works? Credit Card Minimum Payment, Credit Card cash withdrawal charges, late payment charges and Everything you need to know about Credit Card.

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Debit cards and credit cards are available at all banks. Credit cards are physical cards that can be used as a loan to buy things and pay bills. Debit cards use the money in our bank account.

Credit card payments help you make transactions to a certain extent, but you can repay them on a fixed date or pay it off in a few months by making the transaction as EMI.

But it’s not like a personal loan or car loan, which are both revolving credit accounts. If you finish paying on time, you can keep borrowing money from the same account. If you pay your credit card bill on or before the payment due date, you will avoid paying interest.

Discovering the advantages of using a credit card over a debit card can be learned by first gaining a grasp of how credit cards work.

How Credit Card Works?

Understanding how credit cards work can offer you valuable insight that can help you manage your debt in a more responsible manner.

You may improve your credit score, make payments more easily, and manage day-to-day costs in your life with the help of a credit card.

When you use credit card payments, credit cards are useful for making purchases online or paying bills in stores, and if you don’t have enough money on your debit card to buy something, don’t worry about it. You can pay using your credit cards.

Your card details will be sent to the merchant’s bank. The bank receives authorization from the credit card network to process the transaction.

Your card issuer must verify your information and approve or decline the transaction.

Read More: SBI Credit Card Application Online

Credit Cards vs. Debit Cards

Credit Cards

  • The most significant distinction is based on the origin of the money used to make a purchase. When you use a credit card, you are taking out a loan (borrowing money).
  • Credit cards provide you with a line of credit that can be used to make purchases, balance transfers, and/or cash advances.
  • However, credit cards also require you to repay the loan amount within the allotted amount of time.
  • When you make a purchase, the total amount that you charge is deducted from the full limit that you are authorized to spend. Your remaining balance is the amount of your available credit. When you make a payment, the amount of credit that is available to you goes back up.
  • If you withdraw money using a credit card, the company that issued you the card will charge you a minimum amount in addition to a percentage of the total amount of cash you withdraw.

Debit Cards

  • When you use a debit card, the funds come immediately from the bank account that is linked to the card.
  • No Credits available. You need money in your bank account to use the Debit Card for purchases.
  • No Monthly re-payment
  • No Limit. You are free to make purchases with the entire balance that is currently accessible in the bank account that is linked to your Bank account.
  • When utilizing a bank account linked to a debit card, you won’t be subject to any transaction fees unless you use a cash machine that is privately owned and operated.
  • If there is a fee associated with withdrawing money from the machine, the total amount of that fee will be communicated to you before you actually withdraw any cash.
  • Because there are no monthly payments required on a balance and hence no late penalties associated with debit cards, they are extremely convenient.

Pros And Cons of using Credit Cards

Find below the Advantages and Disadvantages of using the Credit Cards.

Advantages of Credit Cards

  • Credit card use offers access to credit. Credit card payments are instant.
  • That means you can use your card now and pay for your purchases later.
  • Every time you swipe, no money leaves your bank account..
  • Credit cards are like loans since you can spend money on credit.
  • If you pay your payments in full every month, you won’t pay interest.
  • Credit cards, unlike debit cards, can boost your credit score.
  • Credit cards let you develop a credit line depending on payments and use. Credit cards are often used to measure a loan applicant’s creditworthiness.
  • Credit cards are necessary for future loans and rentals.
  • If you need to make a big purchase, but your savings are not enough, you can pay by credit card. Apart from this, you can also choose to repay as EMI.

Dis Advantages of Credit Cards

  • Credit card minimums are a major drawback. Many credit card consumers think the minimum payment is the amount the company requires to continue providing credit.
  • Credit card payments may seem simple at first. But there are many hidden charges behind it that can increase the overall costs.
  • Credit cards have many fees such as late payment fees, joining fees, renewal fees, and processing fees.
  • Repeated late payments may result in your credit limits being reduced.
  • Because your bank balance stays the same with revolving credit, it’s easy to charge everything to it, and you never know how much you owe. This can lead to debt and overspending.
  • If you do not pay your balance by the due date of your billing, you will be charged interest.
  • This interest accrues as a fixed amount on purchases made after the interest-free period.
  • Credit card interest rates are very high, with an average rate of 3% per month, which can be as high as 36%.

Credit Card Tips – All you needs to know about Credit Cards

  • Credit cards are not similar to debit cards, they have a credit limit within which purchases can be made.
  • Make sure to repay the money on the later due date.
  • A credit card is a convenient way to make purchases and earn rewards without spending money on debit cards.But you should remember that the credit amount is liable for repayment.
  • Don’t use a credit card to buy things that you can’t afford.
  • You may track your purchases throughout the month with your credit card’s mobile app or website.
  • Once your monthly spending limit has been reached, you shouldn’t use the card again until the balance is paid off.
  • Using this type of credit will help you build a good credit score and keep you from going into credit card debt.
  • Scheduling automatic payments helps your credit payment be done on the right date.That way, your credit cards help you pay off debt on time.
  • Make sure the due payment is more than the minimum amount to pay, ideally your entire balance, and make sure you have enough funds in your checking (bank) account before scheduling the payment.
  • To continue using the Credit Card, you need to make the minimum amount, set by the card company based on your previous month’s credit usage, every month by the balance due date.
  • This can sometimes be forgotten, so scheduling automatic payments help payments on the right date.
  • Each month, the card issuer will send you a statement detailing your credit transactions.
  • Even if you have a scheduled monthly payment, make sure it is correct on the billing statement.
  • If you discover any errors entered or unauthorized charges, notify your card issuer immediately so they can be cleared.
  • Carrying a balance on credit cards can result in interest charges.
  • It’s important to pay close attention to the small text on credit card promotions.
  • Some credit cards allow you to earn credit points on purchases in the form of miles or cash back.

What is Credit Limit

The credit limit is the purchase limit of your card. This is the maximum amount you can spend with a credit card.

It is extended by the lender and contractually accepted by the cardholder. The card issuer sets the limit, based on the clients’ credit scores and credit reports.

Credit limits are defined depending on your financial situation. A credit limit helps you stay out of debt.
Using credit cards frequently and making regular repayments can improve your credit score.

The following factors are decided your credit limit:

Factors Influencing Credit Limit

The credit limit that you are given is determined by a number of factors, including the sort of credit card that you have, your income and ability to pay, any other obligations that you may have, your credit score, and your history of making payments on time.

If you have a history of responsible use with your credit card, the company that issued you the card may consider raising your credit limit.

Credit limits are subject to eligibility as assessed by the issuer. If your credit history indicates that you are a high-interest borrower, your card limit will be lower.

Similarly, a low-risk borrower with a good credit rating can get a higher credit limit.

The following factors determine your credit points.

  • Personal income
  • KYC details
  • Current debt
  • Security in relation to employment status
  • Current credit in your name
  • Loan repayment history

These factors determine your credit score and credit limit. Alternative options of credit cards and credit limits may be open for negotiation.

No expenditure/purchases may be made in excess of the credit limit. Doing so may exceed your limit and incur additional penalties and fees.

It can also negatively affect your credit rating. When you make repayments, your available limit is automatically adjusted.

How to Understand Total and Available Credit Card Limit


The current balance on your card is reduced by the number of your credit card limit. It is advisable to pay your credit payment on the right date of every month.

The total credit limit is the maximum amount you can spend on your credit cards. The available credit limit is the current credit balance available on your monthly expenses.

Therefore, you will have plenty of credit available, and making payments on time not only helps your credit score but also ensures that you can use your card in an emergency.

How To Check your Credit Card Limit

If you forget your tour card’s credit limit, phone the Card issuer or check your online bank account. There’s your card’s credit limit.

This information is available in your account’s documentation. If your card’s credit limit is too low, consider raising it.

Following are the steps to find the limit of your card online:

  • Step 1: Log into your Online Banking
  • Step 2: From the left side of the side menu, click on “Cards”
  • Step 3: Select the “Card Summary” option
  • Step 4: Select “Card Details” here you can view the card limit assigned under the “Approved Credit card Limit”
  • OR, On the other hand, if you wish to learn your credit limit on your card, you should contact the card issuer company.

How Your Credit Card Limit Can Be Increased and the Benefits of Doing So

All requests for credit card limit increases will be reviewed on a case-by-case basis.

Your credit card limit will be filled only after considering factors like your credit history, personal income, and credit score before increasing the credit card limit.

A higher credit card limit increases your purchasing power flexibility and credit score.

If you make your repayments on time and have a good credit history, it will help you get a credit card limit increase.

Look for a credit card with a higher credit card limit. This is easier than increasing the credit card limit on an existing card.

What happens if you spend more than the credit card limit?

If you want to spend more than your credit card allows, you need to first ask your bank to raise your credit card limit. This is the safest way to do it.

If you don’t do either of these, the following will happen if you go over your budget.

Your over-limit transactions will be declined:

Some Credit card charges a fee if you go overspending on your credit card. Also, you can only exceed your credit card limit up to a predetermined amount.

If your current credit card balance exceeds your total credit card limit, all subsequent transactions will be declined.

Credit card limit may be reduced or canceled by the issuer:

If you overspend without notifying the bank, you may be charged a transaction penalty.
Otherwise, your card will be declined at the merchant site.

If you are a repeat offender, your card limit may be reduced or canceled by some issuers.

It may affect your credit score:

Over-limit spending reflects badly on your credit score. To avoid this, you should always try to pay off the over-limit dues as soon as possible.
If not, don’t spend above the limit. Otherwise, it may make it difficult to apply for a new credit card in the future. limit may be reduced or canceled by some issuers.

Credit Card Cash Withdrawal Charges

Credit card cash advances always attract finance charges. Interest is charged on a monthly percentage basis.

Refunds will be charged from the date of the transaction until fully paid. Banks usually charge an interest rate of 2.5% to 3.5% on all cash advances.

Billing Cycle

Billing cycle: This is the predefined length of time that you have from the time you make purchases until you receive your bill.

If you wait until the beginning of the billing cycle to make purchases, you will have a longer time of credit. This means that you will have more time before you are required to pay for the items you bought.

The billing cycle for credit cards is one month, and it might span anywhere from one statement date to another.

The statement for the credit card will reflect all of the debits and credits that were made during that time period.

Credit Card Minimum Payment

Minimum Payment: You have the option to pay the minimum required by the bank if you are unable to pay the complete amount that is due.

‘Minimum Payment Due’ means that the minimum payment is the small fraction of the total outstanding bill amount that you must pay to the bank if you are unable to pay the entire bill amount.

It is essential that you make at least a monthly payment on your monthly credit card bill, on or before the due date.

How to Calculate Credit Card Minimum Payment

In most cases, the amount of the minimum payment that is due is equal to five percent of the total sum that was still outstanding on the date that the credit card statement was generated.

The minimum amount that a user must pay may, however, be increased by the following fees, which are examples of the types of fees that may be assessed:

If a user chooses to pay for their acquisitions using EMIs, and there is a minimum balance from the billing cycle preceding the current one that was not paid in full, the interest amount will be added to the amount that must be paid as a minimum.

Secured Credit Cards

A secured credit card could be an option for you if you are just starting out with credit or if you are working to rebuild your credit.

When you apply for a secured credit card, you are required to make a refundable security deposit, which is then used by the card issuer as collateral.

After that, you can use the card in the same way that you would use any other card. You’ll be able to get your deposit back if you make responsible use of your card or if you close your account and pay off the balance on your card before you do so.

Annual Fee

Credit cards frequently come with either an annual fee or a reduced rate on the first year’s yearly payment.

The Annual fee amount is dependent on the card, and after any introductory period, it may change.

There are also credit cards available for businesses, credit cards with no annual fees, credit cards with introductory rates that are either low or zero percent, and other types of credit cards.

Credit Card Interest

If the full amount of the credit card payment is not paid when it is due, the remaining balance will begin to accrue interest (also known as a finance charge or annual percentage rate), which is calculated daily.

What is APR Rate

  • Your credit card’s annual percentage rate also referred to as the APR,
  • It is a rate that is calculated on an annual basis and indicates the cost of maintaining a balance on the card.
  • Your annual percentage rate (APR) is calculated by adding together your interest rate and any other fees or costs associated with using your credit card, such as the annual fee (if it has one).
  • The Prime Rate is used as a basis for determining the annual percentage rate (APR) that is tied to the vast majority of credit cards.
  • This implies that the annual percentage rate (APR) that is associated with your card may undergo adjustments at some point in the future.
  • Financial institutions must disclose the APR of a financial instrument before signing any contract.
  • APR provides a consistent basis for presenting annual interest rate information to protect consumers from misleading advertising.
  • An APR may not reflect the actual cost of the loan because lenders have a reasonable amount of discretion in calculating it, except for certain fees.
  • APR should not be confused with APY (Annual Percentage Yield), which takes interest compounding into account.

Late payment Charges Of Credit Cards

If the invoice debt is not paid by the late payment date it becomes a late payment in accordance with the Late Payment of Commercial Debt Act and an additional late payment charge is levied.

Different bank’s late payment charges are listed below:

SBI Credit Card

  • ₹400 for a Minimum Outstanding Balance of ₹501
  • ₹1300 for a Minimum Outstanding Balance of above ₹50000.

ICICI Credit Card

  • ₹100 for a minimum balance of ₹101
  • ₹750 for the minimum outstanding amount above ₹10000.

HDFC Credit Card

  • ₹100 for a minimum balance of Rs
  • ₹950 for minimum outstanding amount above ₹25000.

Axis Bank Credit Card

  • ₹100 for a minimum outstanding balance of Rs.301
  • ₹1200 for minimum outstanding amount above ₹50000.

HSBC Credit Card

  • ₹250 or 100% of the outstanding amount
  • ₹1200 or 100% of the outstanding amount

Robins Antony

I am an active blogger who makes regular use of a variety of banking services, including online banking, banking mobile apps, credit cards, debit...

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