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Aug 19, 2011, 03.30 PM IST | Source: Moneycontrol.com

How your credit card works

IT'S said that Forewarned is often Forearmed. This aphorism has given birth to a generation of knowledge seekers. Everyone wants to know every detail about everything before they do anything.

How your credit card works
IT'S said that Forewarned is often Forearmed. This aphorism has given birth to a generation of knowledge seekers. Everyone wants to know every detail about everything before they do anything. No wonder websites like Howstuffworks.com have been born and are doing rather well.

While it may not serve any purpose to know how snow leopards mate or how galangal is grown in Thailand, there are a few things that we would do well to learn about. Credit cards is definitely one of them.

Let's learn some fast facts:

The Basics

  • When you apply for a credit card, the bank you apply to carefully screens your application. You cant blame them given that there is always a crook around the corner.

  • A credit limit is worked out for you, based on your financial capability and other parameters like income levels, educational qualifications, age etc. The bank that issues you the card is called the 'issuing bank'.

The Business

From the bank's point of view, credit cards are good business for two reasons.

  • Banks make money through fees from merchant establishment.

  • The higher than normal interest rate paid by cardholders for the balance in their card.

  • So what are these merchant establishments? These form the heart of the business. Merchant establishments can be hotels, shops, travel agencies or any place where money transactions are made. The banks that enroll merchant establishments are called 'acquiring banks'.

  • The relationship between the bank and the merchant establishments is run via international networks such as Visa and Master card.

  • Your credit card is valid in any merchant establishment that accepts your network (ie Master Card or Visa), irrespective of the issuing bank. Most Indian card issuing banks are part of either Master Card network or Visa network, or both. There are others credit card networks like American Express and Diners Club too.

  • The merchant establishment finds the credit card a safer and efficient payment mode, and brings more business. The merchant establishment pays a fee to the bank that enrolled it for the service.
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