How credit cards work

A credit card is a financial tool issued by a financial institution that enables cardholders to make purchases and settle for goods and services based on a pre-approved line of credit. It functions as a temporary monetary advance, allowing cardholders to spend up to a specified credit limit set by the card issuer.

Operational Mechanism:

1. Application and Approval: The process begins when an individual applies for a credit card with a financial institution. The institution evaluates the applicant’s credit history, income, and other factors to determine whether to approve the application.
2. Setting the Credit Limit: Upon approval, a credit limit is established for the cardholder. This limit represents the maximum amount the cardholder can spend using the card.
3. Card Usage: With the card in hand, the cardholder can make purchases at physical or online establishments by inserting the card into payment terminals or providing card information for online transactions.
4. Transaction Processing: When making a purchase, the card issuer verifies whether the transaction amount is within the cardholder’s credit limit and whether the transaction is legitimate.
5. Issuance of the Statement: Transactions made during a specific period (usually a month) are grouped into a statement. The cardholder receives the statement at the end of the billing period.
6. Payment: The cardholder has the option to pay the total amount due on the statement or a specified minimum amount set by the card issuer. If the full amount is not paid, the remainder is financed and subject to interest.

Fees and Charges:

• Annual Fee: Some institutions charge an annual fee for using the credit card.
• Transaction Fees: These may include foreign transaction fees, cash advance fees, among others.
• Interest: If the cardholder does not pay the total amount due by the due date, interest is charged on the outstanding balance.
• Penalties and Fines: These may be imposed for late payments, exceeding the credit limit, among other reasons.

Benefits and Rewards:

In addition to the convenience of deferring payment, credit cards also offer a variety of benefits and rewards, such as cashback, reward points, travel insurance, fraud protection, among others.

Precautions:

• Responsible Management: It is important to manage credit card usage responsibly, paying statements on time and avoiding accumulating debt.
• Reading the Terms and Conditions: Before applying for a credit card, it is essential to understand the terms and conditions, including fees, charges, and reward policies.
• Expense Control: It is easy to be carried away by the available credit on a card, so it is important to maintain conscious control of expenses and not exceed the credit limit.

Conclusion:

Credit cards offer a convenient payment method, allowing cardholders to make purchases and pay for them at a later date. However, it is crucial to use them responsibly to avoid debt accumulation and maximize the benefits offered.