WHAT IS CREDIT CARD AND HOW DOES IT WORK?

 A credit card is a plastic card with specific security and other features that is issued by a bank to its customer to enable the customer to use it as a payment medium. The card also entitles the cardholder to certain credit limits/funds such that a payment can be made even if the customer's account does not have adequate balance. 

Thus a credit card is both an instrument of payment and a source of credit.

Case study-

Suppose one purchases grocery and pays the retailer's bill by means of a credit card. The retailer swipes the card and gives a credit slip which the buyer has to sign. Clearly the buyer has not paid cash to the retailer. In this process, the credit card account with the bank is charged with the amount of grocery purchased. 

But how does the retailer get his money?

The answer is that the charge that the buyer incurred in buying grocery is 'acquired' by the retailer's bank. It will provide the retailer with the amount of transaction made by the buyer, less commission. This bank, called the 'acquiring bank', in turn will submit the charges to the bank (which issued the credit card) called the 'issuing bank' through the clearing mechanism maintained by the network sponsors like Visa or Master Card or Rupay. In turn, the issuing bank will send the bill (say, once in a month) to the buyer/ person to whom the card was issued detailing all the transactions made by him/ her with the credit card. The moment the buyer pays the due amount to the card issuing bank, the whole transaction cycle is completed.

Parties involved in CREDIT CARD TRANSACTION-

1)The Customer (Card Holder)

2) The Retailer

3) The Acquiring Bank

4) The clearing Network

5) The Issuing Bank

Credit card and its features

Credit card facility can be defined as one where the issuing bank provides the customer access to payment services and a pre-approved line of credit usually for a time period, which is pre determined. This would enable the cardholder to make transactions now and make payments later to the bank. This is popularly known as 'Buy Now and Pay Later'. 

Benefits by using Credit Cards-

1) To the cardholders-

* Convenience- Hassle free shopping

*Security

*Emergency protection

*Universal Acceptance

*Simplified Record Keeping

*Consumer Protection

*Value Added Benefits

*Flexibility

*Easier Budgeting

*Email, phone or Internet purchases

*Reward Points

2) To the retailer-

People tend to buy more with credit cards.

3) To the acquiring bank-

Earn a commission fee by mediating with the retailer

4) To issuing bank-

*Card business provides an opportunity to attract new potential customers

*Tremendous scope for increasing profits through interest and other charges from cardholders and commission from merchant establishments.

*Additional service to existing clients leading to enhancement in customer satisfaction

*Better network of cardholders and increased use of cards leads to good image building for a bank.

*Bank can get into its fold HNI (High Networth Individuals) clients by offering various types of cards such as platinum, gold, silver and executives etc.

Generally, Credit Card is given to those customers whose CIBIL score is acceptable as per the bank policy. The credit Card is one type of clean credit facility extended by bank so the due diligence done as per the credit policy of the bank.

It is also note worthy that a customer can also take a credit card against the fixed deposit. 

Reference-

Various Bank websites, IIBF site