How Credit Cards Work
purchase procedure
Credit cards can be used to purchase goods and services either in person or remotely. They can also be used to withdraw cash from a cash point machine or via a bank.
buying in person:
The credit card is swiped by the sales assistant through an electronic terminal which prints a sales voucher with the card and transaction details, or reports that the transaction has not been authorised.
Alternatively, the card can be placed in an embossing machine to produce a voucher with card details. Authorisation for the transaction can be given over the phone if required.
You sign the voucher and the assistant compares it to that on the card.
buying remotely:
You can also use a credit card to purchase products or services remotely, via telephone or the internet. All you need to provide is the credit card number, expiry date and card holder's name. This allows you to make purchases instantly and removes the risk of losing cash or a cheque in the post. However, using you credit card remotely introduces a risk that your card details could be used fraudulently.
withdrawing cash
A credit card can be used in conjunction with a PIN number to withdraw cash from a cashpoint or bank against your available credit. There may be a charge for this service and interest is normally charged from the date of withdrawal, even on cards that offer an interest free period. The interest charged on cash withdrawals is higher than interest charged on normal transactions.
credit limit
When your application for a credit card is accepted you will be told what credit limit you have been given. You can make purchases up to this credit limit. Trying to make further purchases once you have reached your limit will result in the transaction being refused.
how interest is calculated
Depending on the credit card, interest is calculated either from the date of the transactions you make or from the statement date.
A credit card that charges interest from the transaction date may be worthwhile if you do not intend to pay off the balance at the end of the month and the interest rate offered is low. Holding the card may also entitle you to a particular benefit that outweighs the additional interest charges.
Credit cards which calculate interest from the statement date and only impose the interest if you do not settle the statement in full are preferable. In practice, this means you can get a maximum of 56 days interest free credit; the transaction can be up to 31 days before the statement and the card issuers usually allow a further 25 days for payment to be made.
sweeper deals
Some banks are now offering 'sweeper deals' meaning that credit card debt can be offset against any savings before interest is calculated.
Thus, if your savings are equal to or greater than your credit card debt you will pay no interest on your credit card at the end of the month. If your savings are less that your credit card debt you will still benefit as the interest charged will be calculated on you credit card balance less your savings balance.
As the interest charged for borrowing is greater that the interest gained through saving, you will be better off.
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