Credit card usage can be both exhilarating and intimidating. From swiping your card in a store to entering your details online, it is important to understand the ins and outs of credit card usage to make informed financial decisions. In this guide, we will break down what credit cards are, how they work in-store and online, explain important terminology, highlight the benefits, answer common questions, and provide practical tips on how to use them responsibly.

What is a Credit Card?

A credit card is a plastic card that is issued by a bank or financial institution.

Credit cards work by giving you a line of credit that you can use up to a certain limit set by your issuer. When you use a credit card to make a purchase, the issuer makes a payment to the merchant on your behalf.

This allows you to purchase goods and services right away, even if you don’t have the money at the time. However, you must pay back what you borrowed within a certain amount of time, usually with interest. If you fail to pay back the borrowed amount, you will build up debt and pay extra fees.

Anatomy of a Credit Card

  • Card Number and Expiry Date: A credit card number is a 16-digit number that uniquely identifies the issuer of the card. It also identifies the account that the card is associated with. The expiry date indicates the month and year until which the card is valid for use. These details are essential for making online purchases and verifying the card’s authenticity. Your credit card details are the most important information when making online purchases.
  • Cardholder Name and Logo: The name of the cardholder on the credit card gives a personal touch and confirms that the cardholder is the authorized user. The logo of the bank or financial institution also adds credibility and trust, both to the cardholder and to the merchants who accept the credit card for transactions.
  • EMV chip and Magnetic Strip: The EMV chip is a small silver or gold-colored square that is different from the magnetic stripe, which is a black or brown strip on the back of the card. The EMV chip is usually located on the front left side of a credit card, covered by a metallic chip plate, and is often placed to the left or right of the card number. The EMV chip is a microprocessor that generates a unique transaction code for each payment, making it almost impossible for fraudsters to clone or replicate your card. The magnetic strip is the part of a credit card that contains encrypted data. This data includes account details and security measures.
  • CVV Number: The Card Verification Value (CVV) is a three or four-digit security code printed on the credit card, usually on the back panel. It acts as an additional layer of security for online and over-the-phone transactions, as it verifies that the cardholder possesses the physical card during the transaction. The CVV number enhances the security of card transactions by reducing the likelihood of unauthorized usage by individuals who may have obtained the card number through illicit means.

Using Credit Cards

Step-by-Step Guide

  • Swiping/Inserting the Card: When you make an in-person transaction, you can use a card reader to swipe your card or insert it into a chip-enabled terminal. This triggers the transaction and gives the merchant the ability to securely access your card information.
  • Authentication Process: Upon swiping or inserting the card, the terminal prompts for authentication. This may involve the cardholder providing a signature, entering a PIN (Personal Identification Number), or both, depending on the transaction amount and security protocols.
  • Approval and Transaction Completion: After authentication, the terminal communicates with the card issuer to verify funds availability and approve the transaction. Once approved, the transaction is completed, and the cardholder receives a receipt as proof of purchase.

Importance of PIN and Its Role

The PIN provides an additional layer of protection to your credit card transactions. It acts as a unique identifier that only the authorised cardholder can use to initiate transactions. Not only does the PIN provide security, but it also helps prevent unauthorized card usage in the event of loss or theft. That’s why it’s important for cardholders to protect their PIN and not share it with anyone else to keep their transactions secure.

Making Online Transactions

Required Details for Online Payments

  • Card Information: Online transactions require entering credit card details: card number, cardholder name, and billing address. This data verifies card authenticity and facilitates secure payment processing.
  • CVV and Expiry Date: The Card Verification Value (CVV) and expiry date add extra security. The CVV, a 3 or 4-digit code, confirms card possession during transactions, while the expiry date ensures card validity.
  • Authentication Methods: Additional authentication methods like OTP (One-Time Password) or biometric verification may be required. These enhance security and safeguard against fraudulent activities during online transactions.

Overview of the Online Transaction Process

The process of online transactions starts with choosing what you want and then going to checkout. Your card details and authentication details are then sent to your payment gateway for safe transfer. The payment gateway sends transaction information to your card issuer for approval. Once approved, your payment gateway communicates directly with your merchant to complete the transaction quickly and safely.

Understanding Credit Card Terminology

Interest Rates

  • Monthly vs. Annual Interest: Credit cards often advertise annual interest rates (APR), but interest is typically calculated and applied monthly. Understanding the difference between annual and monthly rates helps users estimate their monthly interest expenses more accurately.
  • How Interest Accumulates: Interest accumulates on unpaid balances from the transaction date until the balance is paid off. This compound interest can significantly increase the total amount owed over time, making timely payments crucial to avoid excessive interest charges.

Credit Limit

  • Factors Determining Credit Limit: Credit limits are determined based on various factors like credit history, income, and existing debts. Lenders assess these factors to determine a suitable limit that balances risk and affordability for the cardholder.
  • Importance of Staying Within Limit: Exceeding the credit limit can result in over-limit fees, increased interest rates, and negative impacts on credit scores. Staying within the credit limit helps maintain financial stability and avoids unnecessary fees and penalties.

Billing Cycle and Due Date

  • Impact on Repayment: The billing cycle is the period between two consecutive billing statements, during which purchases are made and payments are due. Understanding the billing cycle helps users manage their spending and plan for timely repayments.
  • Maximizing Grace Period: The grace period is the time between the end of the billing cycle and the due date for payment. Making purchases early in the billing cycle extends the grace period, allowing more time for repayment without incurring interest charges.

Minimum Payment vs. Full Payment

  • Consequences of Minimum Payment: Paying only the minimum amount due can lead to prolonged debt repayment, as interest continues to accrue on the remaining balance. It may also result in higher overall interest costs and negatively impact credit scores.
  • Avoiding Interest Charges: Paying the full statement balance by the due date avoids interest charges altogether. This not only saves money on interest but also helps maintain a healthy credit score by demonstrating responsible credit management.

Frequently Asked Questions (FAQs)

1. How do credit card interest rates work?

Credit card interest rates, often expressed as Annual Percentage Rates (APR), represent the cost of borrowing money on the card. Interest is typically calculated based on the outstanding balance and applied monthly if the balance is not paid in full by the due date.

2. How is the credit limit determined?

Credit limits are determined by the card issuer based on factors such as the applicant’s credit history, income, and existing debts. A higher credit limit indicates a greater borrowing capacity, while exceeding the limit may incur fees and penalties.

3. What are the fees associated with credit cards?

Common fees include annual fees, late payment fees, over-limit fees, and cash advance fees. Understanding and avoiding these fees can help minimize the cost of using a credit card.

4. How can I dispute unauthorized transactions?

If you notice unauthorized transactions on your credit card statement, promptly contact your card issuer to report the issue. They will investigate the matter and may issue a refund if the transactions are indeed unauthorized, providing you with protection against fraudulent charges.

Credit cards allow borrowing funds for purchases with the obligation to repay, often with interest. They offer convenience and financial flexibility. Responsible credit card usage fosters financial stability and builds a positive credit history, enabling access to future credit opportunities. Pay balances in full, monitor spending, avoid unnecessary fees, and prioritize timely payments to maximize benefits and minimize financial risks associated with credit card usage.

RBL Bank offers a wide range of credit cards suited to different people and lifestyles. Whether you enjoy going on trips or shopping, there’s a card for you. Explore the exclusive benefits and privileges available on our website and take the opportunity to apply for a credit card that aligns with your financial goals.

Apply for RBL Bank Credit Cards Today!