Santa Claus comes around just once a year. In the meantime, there are Credit Cards.
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    How a Credit Card Works

    Switch from paper to plastic, because that is where the world is headed to. Credit cards are one of those financial products that have revolutionised the entire economic world. Credit cards are small plastic cards that allow the holder to purchase goods and products on credit. Almost all banks and financial institutions provide credit cards to customers. Most credit cards also come with additional perks and features. Some of these cards are tailor made to suit the needs of certain individuals such as travel cards, lifestyle cards, business cards and so on, that cater to a specific category of customers. Before delving into the exciting world of credit cards and their various offerings, individuals will have to understand how a credit card works.

    Understanding the Workings of a Credit Card

    There are a number of parameters and parties that are involved in the entire process of credit card transactions and processing. These include -

    • Merchant - Can be an individual or a company and uses a POS or point of sale terminal to swipe the credit card.
    • Acquirer - An acquirer is one who issues a POS machine to a merchant. This can be a financial institution or a bank that processes debit or credit card payments on behalf of the merchant such as ICICI Bank, HDFC Bank and so on.
    • Issuer of credit card - This is a credit card company or a bank that offers individuals credit cards.
    • Association - These are payment processing networks such as MasterCard and Visa. Some companies such as American Express act as both payment processing networks as well as credit card issuers.
    • Payment Gateway - This is used when an individual shops online. It refers to an online application for authorizing payments for credit cards. It is somewhat similar to a physical point of sale terminal at outlets.

    How a Credit Card Transaction Works

    When an individual swipes their credit card at the POS terminal of the merchant, a request is submitted by the merchant to the acquirer through a dial-up modem phone connection or a dedicated network connection. A request is then sent to the acquirer to the issuer in order to authorise the transaction. The cardholder’s account is then verified by the credit card issuer in order to cover the purchase. In case there is sufficient credit available, an authorization code is sent to the acquirer. The transaction is then authorised by the acquirer and the cardholder gets the product.

    There are a number of individuals who swipe their card at the exact same merchant each day and in order to track these sales receipt, the merchant will send these requests in batches. This batch is sent through the card association/network (MasterCard/Visa) in order to request payment from the issuer (Card or Bank provider). This network then distributes each of these transactions to the relevant issuer.

    The credit card company then deducts its interchange fee which can range from 1% to 3% of the transaction amount and is then shared with the card network which transfers the relevant amount to the acquirer. This acquirer will then keep a margin or discount rate and transfer the rest to the merchant.

    The merchant will receive the amount after a deduction of 1.5% to 3.5% of the value of sale(s). The transaction rates may vary for each and every merchant based on the number of transactions or volume, type of transaction and category. These rates are generally set by contract between the acquirer and merchant.

    This process is the same for online shopping as well, except for those payments that are processed through payment gateways such as PayUMoney, VeriSign and so on, instead of POS terminals at all merchant establishments.

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