People say that hope for the best and prepare for the worst. It is perhaps the single greatest advice in the history of the mankind! This is the bedrock of the philosophy of preparing yourself for the most important things in life. While this may seem like a stretch in general life, but this advice is especially important to anything related to your finances. Credit Cards is one such domain. The more you know, the better decisions you make regarding Credit Cards!

First thing first, let us understand the basic functionality of the Credit Card system and how it works:

When one applies for a Credit Card, the bank you apply to performs its due diligence and carefully screens the application. It is generally done as a precaution to weed out criminal characters.

Based on your financial capability, a credit limit is figured out. It also involves factors such as Income Levels, Age and Educational Qualifications. This limit is set by the bank that’s going to issue you the card and is termed as the ‘Issuing Bank’.

Bank’s provide Credit Cards because, from their point of view, it is a good business. They make money through two methods here. Their first revenue stream is through fees from the merchant establishment. They also make profits from higher than normal Interest Rates paid by the Credit Card holders.

What is a Merchant Establishment? And how does the System Works?

Merchant Establishment forms the heart of this business. A Merchant Establishment can be a shop, hotel, travel agencies or a business where money transactions are made. These Establishments once enrolled with the banks, can utilize the system of Credit Cards. The banks that enroll such establishments are called the Acquiring Banks.

This relationship between the Banks and the Merchant Establishments is run through international networks such as Master Card and Visa.

The credit card that is issued to you is valid for use in any of the merchant establishment that accepts these international networks such (Visa or Master Card), irrespective of the issuing bank.

In India, most banks that issue credit cards are part of networks, such as Master Card, Visa Card, American Express and Diners Club.

For the merchant establishments, a credit card is a far better payment option because it is safer and more efficient payment mode. At the same time, it brings more business as well. These merchant establishments pay a fee to the acquiring banks for these services rendered.

When an individual uses a card at a merchant establishment to purchase a product or a service., the card is applied on a swipe machine. This swipe machine is that is connected to a central computer that belongs to the network. It then approaches the issuing bank for a digital verification. After the system verifies it, it checks whether you have sufficient credit to cover the purchase. Based on this, it either accepts the transactions or rejects it. If the approval comes through and the transaction is carried out, you are asked to sign a charge slip. The merchant verifies your signature with the one placed at the back of the card.

The merchants forward the charge slip to the Acquiring Bank. At this stage, the bank settles the transaction with the merchant. The Issuing Bank starts the process of billing for the payment as per the predetermined cardholder agreement. The Acquiring Bank settles the transaction with your Issuing Bank through the network.

Pretty simple, right? It is not an extremely convoluted process. Credit Cards are used by millions of people across the world. If you are wondering why some people bad mouth them or are scared to use one, is because of the delayed payment interest cycle. When an individual uses credit cards, one has the option to pay only a part of the total amount. The rest of the amount is then carried forward. The important thing to consider in this case is that one will have to pay interest on all the purchases without any free credit period.

This problem can be easily resolved if you are a prompt in paying your balance by the due date. The Issuing bank usually provides a free period of the credit. A credit card holder gets this free period before they have to reimburse the amount without any penalty. This period may vary from fifteen days to almost up to 40 days. The reimbursement period depends on your issuing bank.

Credit cards are an efficient financial tool that when used smartly can be a boon to your life. Managing your finances can be a tricky and sometimes daunting task. The best strategy to proceed towards financial well being is to arm yourself with as much information as possible. You can use the extensive knowledge bank of Chqbook as your go-to place for anything related to your finances.

If you are looking to get access to Credit Cards, you can use Chqbook’s listing to find an ideal credit card with your favorite Issuing bank. From Personal Loans to Home Loans, Chqbook is there to always guide you through the financial quagmire.

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