How does a Credit Card Work?

A credit card is a type of unsecured borrowing under which a bank or NBFC agrees to offer you a predefined credit limit. You can make transactions up to the said limit and pay it back on the due date or convert the transaction into EMI and pay over a period of a few months. Unlike personal loans or car loans which are installment loans accounts, credit cards have a revolving credit account. This means you can borrow money on the same account again and again as you keep paying the dues.

How its Work ?

As said above, a credit card lets you borrow money (up to the given credit limit) and pay it back as and when due. When you make a purchase, the amount will be deducted from your credit limit and when you pay it back, the payment will be added back to your credit limit. This gives regular access to credit as long as you do not max out your limit.

Let us understand this with an example.

You have an HDFC Credit Card with a total credit limit of Rs. 1 Lakh. You purchase a TV for Rs. 30,000 and convert it into EMIs of 6 months and you also spend Rs. 5,000 on miscellaneous expenses. After these two transactions, your credit limit will be Rs. 65,000. Now, once your bill is generated for the cycle, it will include the EMI of Rs. 5,000 and other Rs. 5,000 spent (apart from other fees and charges). Once you pay Rs. 10,000 towards the bill, the same amount will be added to your credit limit and you will now have an available limit of Rs. 75,000. This cycle continues as you make purchases and pay bills

However, if you do not pay your credit card bills in full, the bank will charge interest or finance charges on the unpaid amount. This amount will keep accruing until you pay your bills completely.