How do credit cards work?

When payment is made using a credit card, in theory the bank or credit card lender is borrowing you the money. A statement is issued every month detailing transactions made with the credit card during that month. Payment from you is needed within a specific time period that the issuer allocates and if the full balance is paid then no interest is charged.

Usually credit cards are issued when the account has been approved by the credit provider; these cards can then be used in shops that accept that particular card.

When a sale is made, the card holder signs a receipt or enters a Personal identification number (PIN) into the payment terminal to pay for the goods. Verification in electronic form allows shopkeepers to verify that the credit card has sufficient funds to purchase the goods and also to make sure the card is valid. 

Verification is carried out using a Point of sale (POS) system that is linked to the shopkeeper’s bank. All the data is held on the magnetic strip and on the chip that is embedded onto the credit card.

As mentioned earlier, a statement is sent through detailing the transactions that have taken place using the credit card. The statement indicates purchases, any fees, and the amount which is owed. The card holder has to pay a minimum amount of the balance by a due date or can pay the full amount.

The interest is charged on the amount owed and is at a higher rate than many other variations of borrowing.