Credit Cards

A credit card is a method of payment someone can use to pay for goods or services. The use of a credit card is based on the cardholders pledge to pay for the items he or she is using to card to buy them with. The credit card is often provided by a bank, which gives cardholders a credit line, where they can borrow from to pay for various items.

Unlike a charge card, credit card balances do not have to have to be paid full every month. Cardholders may carry a balance over into the next month, but that balance will be charged interest. When a credit card is used, another party (bank) will pay the merchant and is paid back by the cardholder. Charge card purchases are deferred by the buyer until the monthly statement is due. How credit cards are used

A cardholder may use his or her credit card wherever said card is accepted. Some places a credit card may be use are grocery stores, gas stations, restaurants and retail shops.

Credit card companies will work out an agreement with various merchants so that they'll accept their cards. Usually, if one wants to know if a store accepts the card he or she can look somewhere in front of the establishment.

Once a credit card is used to make a purchase, it puts the cardholder's agreement to pay the card company into play. Purchases are tracked through the buyer's signed receipt; all pertinent details are included in a credit cad receipt: date of purchase, how much was spent, the name of the retailer, etc. Signing the receipt essentially turns into a promissory note that says the cardholder will pay back the card company.

A cardholder must have sufficient funds to use a card to make a purchase. Merchants possess electronic verification systems that let them know almost instantly if the card used has enough money on it for the purchase to go through. If not, that card will be declined, and the customer must use another form of payment, whether it's another credit card or cash. Cardholders can also use their credit card to make purchases where they card isn't "swiped". This may happen for online or over-the-phone orders. To protect the cardholder's privacy, the merchant may ask for information like the three or four-digit code on the back of the card or the card's expiration date.

At the end of the month, the credit card company will send a statement to the cardholder. This is a breakdown of what was purchased with that particular card and when. The statement will also let the cardholder know how much money he or she currently owes; both the minimum amount and the full balance. Cardholders can pay either of these amounts, but the important thing is that the statement is paid on time. Otherwise, the cardholder will be hit with a late fee. And while the minimum payment is all that's owed to avoid a late fee, the remaining balance will have interest added to it.

Interest and Billing

The best way to avoid paying interest on credit card purchases is to pay your bill in full every month. Otherwise, you'll see interest tacked on to your current balance. Interest is charged on the current balance from the date a purchase was made.

How much interest a cardholder pays on his or her outstanding balance will depend on the card company and the agreement reached when the card was issued. Many financial companies will determine the interest by taking the annual percentage rate (APR), divide it by 100, multiply that figure by the average daily balance (ADB), divide it by 365 and multiply that figure by the number of days the amount existed prior to the payment being made.

Some financial institutions will implement a grace period to give a cardholder additional time to pay off their card balance before interest is added on to the balance. These may range from 20 days to two months. Such leniency doesn't exist when it comes to late balance payments. Paying late can hurt a cardholder in a number of ways: besides the interest, you'll have to pay additional finance charges and it will hurt your credit.

The Credit Card Process

When you use your credit card, there are more people involved than just you and the store where you're making a purchase. After you swipe your card, the bank who issued your card makes the payment and bills you for reimbursement. There's the merchant who accepts your credit card payment; remember you must have sufficient funds on your card for the payment to go through. The merchant's bank accepts your payment when it's approved.

On the back end of the transaction, there are independent sales organizations that the merchant deals with, credit card associations, transaction networks, affinity partners and insurance companies who have their hand involved in one way or another.

Just like there are a number of parties involved in credit card transactions, there are also several steps. When the customer opts to use his or her credit card to make a purchase, the merchant sends the payment to its acquiring bank for authorization. Some of the information being verified is the card number and how much available credit the cardholder has. If everything looks OK, the merchant will get an "Approved" message.

Acquiring banks don't handle each transaction it receives one at a time. Instead, they're handled in batches and are submitted at the same time at the end of the business day. Transactions that aren't included in the batch remain authorized for a limited period of time before that amount of credit goes back on the customer's card. An example of a transaction that might be on a temporary hold is a hotel room or rental car deposit.

After batching, all transactions are run through the credit card association. The issuer's funds will be withdrawn from and the acquirer is paid. Finally, the acquirer pays the merchant the amount in the batch, with any fees the merchant must pay the acquirer for processing the transaction. Usually, that will conclude a credit card purchase unless there is some sort of a dispute that would stall the transaction going through.

Types of Credit Cards

Credit cards often work as you have credit balance on your card based on your credit report. If you make payments on time every month, the financial institution may increase your credit limit. Depending on your spending habits and financial situation, there are other card set-ups that are available to you.

Secured cards

Secured credit cards allow a user to put a deposit down for the amount of credit he or she wants. A standard deposit ranges between 100% to 200% of the total amount of requested credit. These cards are distributed to help reduce the chance of the user missing a payment. It's a good option for a cardholder with little or poor credit history and well as the credit card company. The prospective card holder can rebuild their credit, while the issuer can grant a card with less risk because in the event of non-payment, it can recover the funds it lent from the original deposit.

It's important to note that the deposit isn't withdrawn from for a missed payment or two; it's more of a safety net for when the delinquency reaches six months or so or if the account was closed.

Business Credit Cards

Business owners and companies may opt to use separate credit cards for work expenses. Business credit cards usually may only be used to make work-related purchases. They also can come with special offers for items a business could use like shipping, office supplies and airfare. A business card can be more difficult to obtain than a personal card due to higher credit score requirements.

Prepaid Cards

Similar to a secure card a prepaid credit card requires an upfront deposit. Unlike a secured credit card, a prepaid card provides no credit. Every dollar that is on this card comes directly from a previous cash deposit. Once money is loaded on to the card, it can be used basically the same way a standard credit card is. There's no interest to worry about since the cardholder isn't borrowing from a financial institution to make a purchase. Prepaid cards may carry monthly fees, however. Since this isn't technically a credit card, the user doesn't have to be 18 to make purchases with it.

Pros and Cons

Like with anything, there are plusses and minuses to having a credit card. One of biggest benefits to having a credit card is the convenience aspect. As most merchants accept credit and debit cards today, there isn't as much of a need to carry cash.

Credit cards may offer rewards such as product warranties, protection for new purchases and rental car insurance. There's also an opportunity to collect points with each purchase which can be exchanged for cash, gift cards or products.

On the other hand there can be a dangerous side of using credit cards too frequently. Since they prevent the need to have cash on hand, it can be easy get dependent on using it, but just as easy to lose track of spending. If credit card spending is handled responsibly, it's not a problem, but sometimes cardholders can get hit with significantly higher interest rates than when they were first issued the card. Unfortunately, some customers get so far into debt with their credit card, they're forced to file for bankruptcy.

Credit cards can also be a good and bad for merchants, just like with customers. On the positive side, it's a secure method of payment; the merchant has peace of mind knowing it will be paid by the bank once the transaction goes through even if the cardholder defaults on the account. Cash of course is the most foolproof method of payment, but from a security and safety standpoint, credit cards may work better because there's less cash to be stolen by employees and or in the event of a robbery. Credit card use also means less trips to the bank for the store owner who other wise would have to deposit checks and cash.

The downside to merchants accepting credit cards is the fees. Merchants could be charged a commission of one to four percent of the each credit card transaction. There's also the chance they'll have to pay a merchant discount rate for each transaction. For low-cost purchases, merchants may make very little profit, or lose money when a credit card is used. This is why you may sometimes see merchants require a minimum purchase amount to pay with a credit card. There's also the cost of purchase processing equipment the merchant must endure.

Security Measures

A credit card is tied to a lot of your personal information like your social security number and credit history. That is why credit card companies go to great lengths to keep your card secure. Online orders are shipped only after it's verified the actual cardholder is making the purchase. One day to that is to verify the shipping address. For an in-store purchase, the cashier may ask to see ID along with the credit card you're using to make a purchase. If a credit card is ever lost or stolen, it's best to call the credit card company and cancel the card right away to prevent fraudulent purchase. If any purchases you didn't make or authorize are made however, you would not be held liable for them.

Other credit card protection methods are only using your credit online when you're a secure website (look or the https) in the manual. Some banks use controlled payment numbers, essentially disposable credit cards to cut down on fraud during online or over-the-phone purchases or any other time when a physical card isn't present to make a purchase. These one-time account numbers serve the same purpose as a credit card and are linked to a user's account.