How do credit cards work

A credit card is a wonderful convenience that lets you pay for your purchases online or offline without cash. But how does a credit card work?

Let’s begin by examining a credit card carefully. A credit card comes with the following:

  • A number that uniquely identifies it
  • An expiry date
  • The name of the holder
  • The logo of Visa or Mastercard – the two companies that provide the infrastructure and systems that process credit card transactions.

On the back of the credit card is:

  • A magnetic strip or chip
  • The CVV number. This is needed for online transactions.

What happens when you use your credit card at a retail store?

Step 1: You have completed your purchases at your favourite store and use your credit card at the checkout counter. The storekeeper will swipe your card or insert it into a POS or point of sale machine. In most cases, the store will ask you to enter a PIN (personal identification number) to authenticate the transaction.

Step 2: The machine reads the strip or chip (which contains information to identify the card) and sends the information along with the PIN to your issuing bank (for example, HDFC Bank if you have an HDFC Bank Credit Card). If everything looks alright (credit limit, identity, validity, etc.), the bank approves the purchase.

Step 3: If the transaction is approved, the machine prints a pair of charge slips or receipts – the retailer retains one and gives you the other copy. In rare cases, where a PIN is not required, the retailer will request you to sign a copy of the charge slip.

You are billed for the transaction in the next statement, and the retailer receives the money after a few days. The whole process works seamlessly on systems and technology provided by Visa or Mastercard.

What happens when you use your credit card online?

When you are paying for purchases online, the e-commerce store will ask you for the following details:

  • Choose whether it is Visa or Mastercard
  • 16-digit card number,
  • Expiry date,
  • CVV
  • Name as printed on the card
  • Billing address (sometimes)

Once you hit pay, the information is sent to your bank via a payment gateway. The bank sends an OTP or one-time password to your registered email ID or mobile number to authenticate the transaction. If the OTP is correct, then your transaction is complete.