A credit card is a thin plastic card, roughly three by two inches in size, which is used by consumers and companies to make purchases. It contains account and identification information on the magnetic “stripe” that is on the back, although some future cards now being developed will use embedded microchips and RFID (Radio Frequency ID).
The financial company that releases a credit card to cardholders provides them a line of credit from a place that those people may have a loan of currency for payment to a business or also an advance of cash. A credit card with a “revolving line of credit” is not the same as a traditional charge card in which the charge cardholder pay the balance every month. Credit cards, on the other hand, allow consumers to revolve the balance owed for the cost of interest payments.
A majority of credit cards are issued by local banks or credit unions. When a credit card provider approves an account application, a credit card is issued, after which time cardholders may use the card to buy things at businesses that accept that brand of card. Today, the information on a credit card can be read by automated teller machines, retail store credit card terminals as well as bank and Internet-connected computers.
At the time that a purchase is made, the credit card user agrees to pay the credit card issuer at a later date. A cardholder shows their approval to pay when they sign a paper or electronic receipt with a record of the credit card and purchase details that also indicates how much is paid. The cardholder can also indicate such agreement when they punch in a personal identification number into a keypad. In the case when a cardholder or the credit card itself is not present, many merchants also allow vocal authorizations through phone and electronic authorization online, which is called a CNP transaction.
Security and Verification
Many electronic credit card verification systems in operation today enable a merchant to authenticate credit cards and ensure that there is enough credit to make a purchase, which happens briefly when they purchase something. The authentication is done by means of a credit card terminal with a communications connection to the acquiring bank of the merchant. Information that the card has is rendered from a magnetic stripe on the card. It also comes from a chip in the case when chip cards or smart cards are used.
Additional verification systems that e-commerce merchants use, for which the cardholder usually gives more information, like an AVS security code or the cardholder’s street address or address of record that matches their credit card bills.
Payments and Problems
On a monthly basis, a credit card user will be sent or e-mailed a statement that documents all purchases made with the credit card, along with any fees and the amount that they owe in total. The cardholder has to pay a specific minimum amount from the bill on the date that it is due. They may alternatively to pay a larger amount or the full amount that they are in debt for. Interest is charged on the amount owed if the balance isn’t completely paid. Some banks allow for automatic payments which can be taken away from a cardholder’s bank account. After receiving the statement, the cardholder is allowed a right to dispute any charges that he or she thinks are incorrect.
There is a great deal of competition among credit card companies and card-issuing institutions, which ultimately benefits the consumer with lower interest rates, added benefits and cash back opportunities.
The “grace period” for a typical credit card is the period that a cardholder must pay off the what they owe ahead of the time when interest will be accrued on top of the balance. These periods vary from twenty to forty days, relative to the issuing bank and the credit card variety. If the grace period has been passed, some account service policies provide for customers to regain their credit cards services once again after specific conditions are fulfilled.
Fees and Penalties
In general, if a credit cardholder pays late, finance charges are tabulated, negating the period of “grace.” A growing number of credit cards offer do not offer a grace period when there is any amount owed from prior bills. There are, on the other hand, a few credit card companies will strictly enforce finance charges on the old balance, and not new transactions.
There are a number of crucially important benefits that the advent and use of credit cards have created for merchants today. For one thing, credit card transactions are certainly safer than taking personal checks, since the issuing bank is entrusted to pay a business when the card transaction becomes authorized, no matter if the cardholder does not make the payment for their credit card. Also, credit cards are safer than cash, as they dissuade pilfering by the employees and keep the amount of cash on hand small at the retail location for potential robberies. Before there were such things as credit cards, merchants had to evaluate credit history of all of their customers before providing any credit whatsoever. Today, of course, banks incur all of the risk in these transactions.
Merchants are charged by the bank what is known as a “discount fee” for their credit card services and for managing the risk factors. In some cases, often some times passes before the merchant receives the payment. The discount fee commission is a small part of the transaction amount, in addition to a set charge determined when a merchant signs up for the account. A merchant may be disciplined, or be prevented from receiving payment from the specific credit card in question and their account use greatly controlled, if there are a sizeable number of “chargebacks” emerging from customer disputes. A few businesses require credit purchases to be a minimum amount to make up for the processing expenses, though this is not allowed by the credit card associations.