How credit card works?

Credit cards have seen widespread use, due to the convenience they offer. No need to carry cash, buy now pay later, facility to avail EMI facility etc. have made this mode of payment very popular amongst shoppers. But do you know it works? What happens from the time you hand over your card at the cash counter to make the payment to when you actually get your card bill?

Credit CardsWhen the cashier swipes your card in the store’s point-of-sale (POS) system, your transaction details are immediately transferred to the merchant’s bank through the communication link. Here your details like card limit, availability of adequate balance and card expiry date are captured and transmitted to your card issuing bank. These details are present in the magnetic strip, found at the back of the card.

Your bank will check all the details and authorize the transaction, if everything is in order and generate an approval code. The authorization is sent to the merchant’s bank, which blocks the purchase amount from your credit limit, so as to pay the merchant later on. The approval code is transferred to the merchant and is fed in by the cashier. It generates two copies of charge slip, which is actually an agreement that makes you responsible for paying your bank.

You sign one copy and hand it over to the cashier and keep the other copy with you. The merchant collects all the other charge slips, prepares batches from them and deposits them in his bank account. His bank sends these batches for clearing and settlement to the credit card association. This purchase amount is charged to your bank, which in turn charges the amount to your card account. 

Though you may think credit card transaction is simple, in reality it is not. There are many steps involved in processing the transaction. You need to be aware of these steps in order to understand how credit card actually works.

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