Explained: Operational aspects of credit cards

A Credit card holder is the customer, or consumer, who is using the card for payment or cash withdrawal. Credit card holders can also add authorized users to their account. The authorized user can make purchases, but the primary holder is still responsible for the debt.

Credit card issuer:

Financial institutions, usually banks and NBFCs, issue credit cards. Every transaction routed through credit card is authorized by the Card Issuer. If a transaction is approved, the issuing bank sends funds to the merchant bank, which in turn bills the card owner through a monthly credit card statement. The credit card issuer is responsible for evaluating the creditworthiness of applicants, Setting credit limits, managing credit card accounts, and facilitating transactions. In India, credit cards are issued by: Scheduled commercial banks, Regional rural banks, Urban Cooperative Banks, and Non-Bank Financial Companies.

Credit limit:

A credit limit is issued to the cardholder. The maximum amount of money a cardholder can use for purchases or borrow from the issuing bank during the billing period. On settlement of the previous bill, the maximum bill will be restored. Credit limits vary depending on a cardholder’s income, credit history, and other financial obligations.

Merchant:  

A merchant is a business that accepts credit card payments from customers for its goods or services. These include in-person, online, or phone payments. Once the card is verified by the card issuer and authorizes the payments normally through one-time password (OTP) entered by the cardholder, the transaction is credited to the merchant’s account and the funds are debited (included) to the cardholder’s bill.

Merchant bank:

A merchant bank, also known as an acquiring bank, maintains the merchant account where the funds from credit card transactions are deposited. Some merchant banks act as payment processors in the card transaction. Others rely on third-party payment processors to manage the payment details.

The credit card processor, also called the “payment processor”, is a company that works with the card networks and issuing banks to authorise, authenticate and settle credit card transactions on behalf of the business.

Billing cycle:

This is the fixed period in which you can make purchases until you get the bill. If you make purchases at the beginning of the cycle, you will have a longer time of credit – that is you get more time before you pay for the transactions.

Free Credit Period:

Credit card purchases normally become payable after a free credit period, during which no interest or finance charge is imposed. Interest is charged on the unpaid balance after the payment is due. Cardholders may pay the entire amount due and save on the interest that would otherwise be charged.

Minimum payment:

There is a minimum amount that the cardholder has to pay for the credit card bill before the due date failing which the cardholder will have to pay charges for the default. However, cardholders can carry forward any amount that is more than the minimum amount, but you will have to pay interest on it. The interest charged could be 3 percent a month, or around 36 percent a year.

Credit card processing:

Credit card processing occurs when electronic transactions involving credit cards are authorised, authenticated, and settled between the cardholder, the business, and their respective financial institutions. This process allows businesses to accept credit card payments for goods or services, facilitating easy and convenient transactions for both the business and the customer.

Card networks:

Card networks – such as Visa, Mastercard, American Express, RuPay, and Discover – facilitate communication between credit card processors and the issuing banks and set transaction rules and standards.

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