How Do Credit Cards Work

How Do Credit Cards Work?

The following 'how does a credit card work' faqs (frequently asked questions), will give you some basic credit card info as to the stages and processes of a card transaction.

There are numerous credit providers and banks who are only too willing to approve and issue a credit card to people with good credit rating. Achieving this however, relies on a three-way working relationship.

Understanding the mechanism of how credit card works within such a relationship is fundamental to the effective use and management of them.

Credit cards work on the premise of there being 3 key participants:

  • A user - you
  • An Issuer - credit card lender
  • A Merchant - the person who accepts credit card payments

    A user makes a credit card application. Once approved, lending is generally set at a pre-determined credit limit (the maximum the credit card user can spend). This enables the user to purchase goods, products, services etc., from merchants who have a working relationship with, and accept that particular lender's card of credit.

    Once a purchase transaction is made by the user, s/he either signs a receipt or enters a PIN number, indicating his/her agreement to pay the issuer of the card for the amount of the purchase.

    How Do Credit Cards Work With Off-line Verification

    An additional speedy transaction method that is increasingly being used is, 'customer not present' (CNP) where the user conducts a purchase over the telephone or via the Internet. This has been made possible by electronic verification systems that enables merchants to both verify the validity of the user's credit card details as well as making sure there are sufficient funds available for the purchase.

    The verification process relies on using a credit card payment terminal or point of sale (POS) communication system that links directly to the card issuer. The magnetic strip (on every credit card) enables the card's data to be checked. This is known as 'chip and PIN'.

    How Do Credit Cards Work With On-line Verification

    When a purchase is made on line, the merchant will seek to obtain additional credit card information from the user in order to determine the validity of the credit card account. The user is asked to provide details such as address as well as the security code on the back of the credit card.

    How Do Credit cards Work In Relation To Monitoring Spending?

    The credit card user is sent his/her credit card information by way of a statement each month that clearly indicate the number of transactions and the amounts spent. It will also indicate any outstanding fees and balance owing, as well as the amount of the minimum credit card payment the card user must pay by a specified date.

    Depending on the purpose for which the card was obtained, the user can opt to either make the minimum credit card payment or else pay either a larger amount or the full outstanding credit card balance. Thereafter, interest is charged at a much higher rate by the credit card issuer on any amount owing.

    How Do Credit cards Work In Relation To Interest Charged?

    If the credit card balance is paid in full each month and prior to the due date, in general the user will not incur any interest charges. However, where the balance is not fully repaid, (even if the user inadvertently clears all but a few cents or pennies) the issuer will charge full interest on the total outstanding balance, which will be from the date of each and every purchase.

    How Do Credit cards Work In Relation To Errors On A Credit Card Account?

    Errors with transactions can occur for a number of reasons, leading to what is known as a chargeback. Chargebacks can happen when:

  • There is an error during processing
  • The credit card user disputes the transaction

    In these instances, the credit card issuer returns the transaction to the merchant for resolution. The merchant must either accept the chargeback or contest it.

    We hope you have found this credit card info guide useful.

    The content on this site is purely for information purposes only and is not intended to replace your seeking professional financial advice.

    Return From How Do Credit Cards Work To Credit Card Credit Home Page