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How does a credit card work? Simple explanation

Summary

While paying by credit card is absolutely natural in the USA, for example, many Germans are still suspicious of the small plastic cards. Here’s how a credit card works. Credit card offers short term interest free credit The advantage of […]

How does a credit card work?  Simple explanation.  Payment by credit card works in a similar way to that with an EC card.  (Source: imago images / Westend61)

While paying by credit card is absolutely natural in the USA, for example, many Germans are still suspicious of the small plastic cards. Here’s how a credit card works.

Credit card offers short term interest free credit

The advantage of paying with credit cards compared to traditional card payments with the bank card is that the amount is not immediately debited from your account. So credit cards give you a short-term loan. Paying with a credit card is not that different from paying with an EC card (electronic cash), the so-called debit card system. However, a signature is usually required after the card has been inserted into the reader, not a PIN.

Once a month, the credit card payments are grouped together to form a single statement. As a rule, the total amount will be automatically debited from your checking account some time later. There is no interest. However, many financial institutions charge an additional annual fee for using a credit card.

CVC code makes credit cards more secure

Credit cards can also be used to withdraw cash from ATMs around the world, just like the EC card. Many online shops also allow payment by credit card. In addition to the card data, a three-digit security code, also known as a CVC or CVS code, must be entered. This code is on the back of most credit cards. It protects against abuse and should therefore never be shared with others.

Prepaid credit cards: finances under control

In addition to the classic credit card, there is the so-called prepaid credit card. However, this is not a “real” credit card. You will not be granted any credit with it. A prepaid credit card must be topped up – usually by bank transfer – before it can be used.

The advantage of this is that you can keep your expenses under control and you don’t run the risk of becoming over-indebted. There are usually no fees for a prepaid credit card. Therefore, this model is also well suited if you only need a credit card for a short time, for example for vacation.