Credit Card Guide : How Do Credit Cards Work ?

How Do Credit Cards Work?

The credit card is a payment instrument that has been around for a generation, for some reason most of us still consider it to be a relatively new innovation. It is true that the card does continue to evolve and change, although the basic principle still remains the same as when it was originally introduced.

At first the card slotted into a manual machine and then an imprint of the card was applied to basic carbon paper, and signed by the credit card holder. For about thirty years a magnetic strip was all that was required for security purposes.

But as credit card thieves became more sophisticated changes were made to address the growing needs of security. In 1993 cards began to appear with an additional microchip, making the humble credit card into a “smart” card.

Compared with the old-fashioned card with a basic magnetic strip, which can not store data on the owner of the card in a safe manner and has a limited memory capacity. Smart cards store information in a secure way and then use that information during the transaction.

With greater memory capacity and the internal microprocessor, the smart card can be used to access multiple services, and more information can be stored on the card itself including personal identification, recent access points, card usage habits and much more.

This feature of the smart card is called "multi-application", unlike cards with a magnetic stripe that only allow usually only one or two functions of payment such as direct access to the account (debit card, ATM) and / or access to a line of credit (credit card).

The credit card is issued by a bank or many other types’ financial institution. The availability of credit varies depending on the financial trustworthiness of the client.

A smart card, which combines the properties of credit card and debit card, also includes microchip security in a small square of silicone only 3 to 5 mm thick which is integrated into the card.

The operating system of credit cards is a process of approval by the banking system; this process is divided into three areas.

The issuer is the company that will issue a person with a credit card. This may be a bank or other financial institution. By offering a card to an individual the company is entering into a loan agreement with the cardholder.

A merchant is the business that, by accepting credit cards for payment for goods and services, enables its customers to pay with their credit cards as an alternative to cash. There is an intermediary for the management of the credit card transactions such as Visa and MasterCard.

Another company will usually supply the merchant with the terminals necessary to connect to the system and make a transaction at the POS (Point of sale), such as a department store or restaurant.

The company that controls the terminal will then deal with the corresponding authorizations enabling the customer to use their card at the establishment. The same company also takes care of settlement operations, namely accounting and transaction confirmation.

This information is constantly sent to the card issuer and terminal management companies that maintain their updated reports respectively with operators and owners. The main card companies worldwide are Visa, MasterCard, Diners, American Express, JCB and China Union Pay (CUP).


Credit Card Transactions

The credit card is a tool that allows you to adjust the repayment after the purchase of goods or services. The face of the card shows the name of the holder, card number and its expiry date. The holder is required to put his signature in the space available on the back of the card.

Example in front of a typical credit card:

    1. Logo of the issuer
    2. EMV chip
    3. Hologram
    4. Credit card number
    5. Logo of payment company
    6. Expiration Date
    7. Name of cardholder

Example of the back of a typical credit card:

    1. Magnetic strip
    2. Strip for signing holder's name
    3. Card Security Code (3 or 4 numbers above the signature)

The transaction involves the agreement of three players.

The card holder agrees to return to the card company the amount of the transaction in the time and manner prescribed by the contract.

The supplier delivers the goods or services requested and paid for by the customer with the credit card.

The issuer agrees to pay on the client's behalf the amount agreed between the customer and the seller of the goods and services.

Each of the three parties gains an advantage from the use of credit cards as opposed to for example, cheques. The customer can buy goods and services without using cash, the supplier is not subject to the risk of a payment by a dubious cheque, and the issuer provides a receives a commission in the form of interest for dealing with the transaction.

As well as payment instrument, the card can be used as a way to withdraw cash at an ATM by the additional use are they secret code known as a PIN number.

The card is a document which certifies there is a contract between customer and the issuer, in a similar way to the relationship between the owner of the shop and the credit card terminal supplier.

The customer can choose to pay the balance each month total to pay zero interest, or make  payment by instalments with a relatively high annual interest rate. In cases of use as a credit card, the customer can not exceed a certain sum agreed in the contract.