How Do Credit Cards Work?

How Do Credit Cards Work?

In Hong Kong, credit cards are often misused and misunderstood. In the right hands, they can be an incredibly convenient way to pay for things, whether in real life or online.

They’re also a great way to take advantage of rewards, air miles and cashback offers which enable you to earn a bit of value each time you use that card.

On the other hand, in the wrong hands, credit cards can land you in debt and put you on the road to bankruptcy.


What exactly is a credit card?

A credit card isn’t just a piece of plastic you flick at waiters when you ask for the cheque, feeling like Pierce Brosnan in that James Bond Visa ad.

When you pay with a credit card, you’re actually borrowing money from a Financial Institution (FI) or bank. You only repay them when your next credit card statement arrives.

While your credit card payments can be considered a type of loan, they differ from most bank loans in that they are much smaller amounts, and must be paid back over a much shorter time period.

In Hong Kong, some of the most well-known issuers of credit cards include:

  • Citibank
  • American Express
  • HSBC
  • Hang Seng Bank
  • DBS
  • Bank of China
  • Standard Chartered
  • Bank of Communications
  • Bank of East Asia


To get your hands on a credit card, you typically apply at a bank, either by using an online form or visiting a branch office.

The bank will evaluate your application and, if approved, offer you a line of credit, which is the maximum amount you are allowed to borrow. You then wait to receive your shiny new credit card in the mail. Flip it around, sign your name on that white strip and you’re good to go.


How do you use a credit card?

There are smart ways and there are stupid ways to use a credit card.

Before you go out and buy up all of Causeway Bay with your new credit card, remember that when you’re using your card to pay, you are borrowing money that doesn’t belong to you—and you will absolutely have to pay it back.

Now that that’s out of the way, here are some ways you can use your credit card:

  • Pay for goods and services locally and overseas
  • Buy good and services online
  • Pay bills


While your credit card enables you to make payments at a wide range of establishments, be aware that some establishments, whether online or offline, will only accept payments from certain brands, the most common being MasterCard, VISA, UnionPay and American Express (AMEX).

That means that you will not be able to make a payment with your AMEX or UnionPay card at a shop or restaurant that only accepts MasterCard and VISA cards. As VISA and MasterCard tend to be the most widely accepted brands, many people prefer to have in their wallets a combination of at least one MasterCard and one VISA card.


So, how do credit cards work?

No, a credit card is not a magic ATM that lets you spend money you don’t have.

Here’s what’s really happening when you swipe that card.


Step #1 – Swiping your card

After standing in line for what seems like ages or waving your arm frantically to attract the waiter’s attention, it’s finally your turn to pay. You pass your credit card to the customer service staff.


Step #2 – Validation

Your credit card is then swiped, conveying information about your account via the Internet. In doing so, the establishment is checking that your account is valid and that the issuing bank or FI will let your transaction through.

If your transaction gets declined, it is probably because of one of the following:

  • Your credit card has not been activated.
  • Your credit limit has been exceeded.
  • You made a late payment on your credit card bill or failed to pay it altogether.
  • There is a hold on your account, such as when you check into a hotel and they put a hold for your deposit.
  • The Internet connection of the retailer is not functioning well.


Step #3 – Payment

If your request for payment has been accepted and there is nothing wrong with the retailer’s Internet connection, your transaction is successful.

The retailer gets your money and your bank or FI will add the purchase to your account.

This happens each time you pay using your credit card. At the end of the month, all the purchases on your account are recorded in your monthly bill.


Step #4 – Your bill

This is the most unpleasant part of the credit card experience. Every month, you will receive a bill from your bank or FI itemising everything you spent money on that month.

The bill will indicate your credit card balance (ie. how much money you owe the bank), as well as the minimum payment that must be made that month.

Of course, that doesn’t mean you should just pay the minimum sum.

That’s because you will have to pay a financing charge, or interest, on any balance remaining. This interest accumulates alarmingly quickly, so if you only pay the minimum sum every month, expect to eventually bust your credit limit.

So what should you do? You should be paying your bills in full every month, making sure to pay by the due date to avoid incurring late payment charges and additional interest fees.


Step #5 – Your credit history

In the world of personal finance, your history can come back to haunt—or help you.

Each time you pay your credit card balance in full and on time, and consistently maintain a low credit card balance, you’re building up your credit rating.

Before FIs and banks will give you a loan, they’ll check your credit history to know whether you’re financially responsible. Using credit cards responsibly will make it easier for you to get a loan for a home or car somewhere down the road.