How Credit Cards Work

How Credit Cards Work

How Credit Cards Work

You use your credit card to pay for a range of goods and services across the globe. Your card is swiped, and within seconds, payment is approved and the transaction is completed successfully - provided you haven't reached your maximum spending limit. But have you ever wondered how credit cards work?

Read on to learn more about credit cards, and how they work to enable cardholders to pay for goods and services at millions of merchants around the world. Still need a credit card? Be sure to find, compare and apply for a credit card online, via a reputable credit card comparison portal.

How credit cards work

Credit cards are a line of credit meaning that they are a type of loan. When you are granted a credit card by a lender, you are essentially being given a certain amount of borrowed money to spend. You'll be assigned a set spending limit, and will have to pay interest on your expenditure. Credit cards are revolving lines of credit, and thus, as soon as you've repaid the outstanding balance, the money is available to be used again.

When you swipe your credit card to pay for a purchase, you're using your lender's money to pay for that item or service, and by signing the receipt (or entering your PIN with a Chip and PIN card), you're agreeing to repay the lender in full. Credit cards are also accepted for many "cardholder not present" transactions, such as telephonic or online purchases.

When your credit card is swiped, an electronic verification system confirms that the credit card is legitimate, and that there are sufficient funds to pay for the purchase. This takes just a few seconds, and the information required to perform this verification is obtained from the magnetic strip on the back of the card, or via the silicon microchip embedded in the card.

Repaying credit card debt

Each month, cardholders receive a statement that lists each purchase made with the credit card that month, other outstanding fees and payments (balances brought forward) and the minimum amount that must be paid towards the outstanding balance by a specific date. This is the minimum amount that must be paid, but larger amounts or the entire balance may also be settled.

Note that interest is charged on outstanding balances. Some credit cards offer interest-free periods during which interest is not charged, provided balances are settled in full before the end of the interest-free period. Cardholders can set up automatic monthly payments from other bank accounts to ensure that the minimum payment is made each month, usually called an Automatic Payment Order, or APO.

Obtaining a credit card

Applying for a credit card is simple, and only a few documents are required - usually your identification document, proof of residence and proof of income. It's possible to apply for a credit card via your bank branch, or online via a credit card portal.

Make use of a reputable South Africa credit card website to explore, compare and apply for the credit card that best matches your spending requirements.

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