Credit cards have become a necessity in the world of today. They offer a flexible and secure way to make payments. Besides, credit cards provide a great way to help spread the cost of a major purchase. However, they can end up being costly if you make minimum payments or forget to pay your bill on time. If you are considering getting a Credit Card Karma and want to know how a credit card works, you have come to the right place. This post will help answer your question.
What Is A Credit Card?
Before we discuss how a credit card works, it is important to know what is a credit card. If you have never used a credit card before, you might find it to resemble magic as all one has to do is swipe a piece of plastic to make a purchase. There is no cash paid. In the simplest of words, a credit card is a card that provides you with access to a credit limit which is issued by the credit company i.e. the bank. The credit limit acts similar to a loan.
So How Does A Credit Card Work?
There is a lot that goes on behind a credit card transaction. Once you swipe the credit card for making the payment, the credit card terminal of the merchant will ask the credit card issuer to accept the card and check if there is available credit.
Then, the credit card issuer responds by sending a message which states that the transaction has been accepted or declined. If the transaction is approved, you can take what you have purchased. However, if it is not accepted, it means that your credit limit has run dry.
Every time you purchase something, the available credit would go down by the amount of money you spend. For instance, if you have a credit limit of $200 and you make a purchase of $50, you would have $150 remaining in credit. You would owe $50 to your bank. On the other hand, if you make an additional purchase of $30, you would end up owing $80 to the bank and would have $120 available in credit.
Is A Credit Card Different From A Loan?
For those of you that do not know the difference between a credit card and a regular loan, the difference between the two is that you have the freedom to make as many purchases as you want as long as you do not exceed the credit limit. However, if you take up a regular loan, you would need to take a loan for every purchase. Hence, credit cards offer greater convenience than regular loans. Credit cards are also known as open-ended accounts and revolving accounts as they allow you to borrow against the credit limit over time.
Credit cards offer great convenience. It is almost impossible to imagine a life without them. Once you have gone over this post, you will understand how credit cards work.