How do credit cards work  

Unlike the olden days, you do not have to carry large sums of money when you go shopping.

All you need to do is take your card with you while shopping, select whatever you want to buy, hand over your card to the cashier to make the payment and walk out with your purchase. So simple, isn't it?

When you hand over your card to the cashier to pay for your purchases he takes it and swipes it in the merchant's point of sale (POS) system.

This system is connected to the merchant's bank via a communication link. This POS system helps in verifying your data by using an electronic verification system.

The details verified include the validity of your card and the availability of sufficient balance on your card to pay for the purchases. This data is available on the magnetic strip, present at the back of the card.

Once your details are transmitted to the merchant's bank, they are sent to your bank which then authorises the payment if all the details are in order. This authorisation is then sent to the merchant's bank, which then blocks the amount from your credit limit so as to reimburse it to the merchant later on.

The authorisation generates an approval code and is transmitted to the merchant. This code has to be keyed in by the cashier, after which two copies of charge slip is generated. This charge slip is your agreement to pay your issuing bank the amount of purchase. You then sign one copy of the charge slip and take the other one with you, along with your purchase.

Just like you, there are many others who use credit cards for their purchases. They also generate their own charge slips. All these charge slips are stored in batches and submitted by the merchant to his bank, at the end of the working day.