The Mechanics of Credit Cards

You may have discovered that some credit card issuers are the same retail banks you may have a checking and/or savings account with. Others, such as Wells Fargo or American Express Centurian Bank, are “captive” banks created for the express purpose of issuing credit cards.

When a credit card issuer opens an account with you, it is with the agreement that you, the consumer, will be able to use their card to make purchases at places where their card is accepted as a form of tender. In return, the consumer agrees to pay back the charges over time, in addition to any and all applicable fees, interest charges, and penalties. The authorization by the consumer to charge his/her card and their agreement to pay is either the signed charge receipt at the point or sale, or verbal consent by phone or electronic consent via Internet.

The magnetic (dark) strip on the back of your card(s) is a form of electronic verification that allows a retail merchant to verify that your account is open, in good standing, and has enough open credit to process the sale. This verification can also be run for purchases over the phone and Internet, with similar verification systems.

As you have learned, the card holder is sent a statement outlining their current charges and amount owed each month. Providing that the cardholder has no disputes with any of the authorized charges, they must pay at least the minimum due at that time. Of course, you always have the option of paying more than the minimum balance due, or even the whole amount. As credit card debt often bears a much higher interest rate than other types of debt, it is always a good idea to pay as much of your monthly credit card total as you can.

As we discussed earlier, credit card issuers will normally extend the consumer a grace period of some 25 days to pay off their charges in full before interest is accrued. If that balance is not paid in full, however, they generally will charge interest from the date of purchase, on the full balance before partial payment. The exact method of calculating your interest should be outlined on not only the terms and conditions you receive at the time of opening your credit account, but also each month on your billing statement.

Your personal interest rate is based on a few factors, the largest being your credit score. Low and 0% interest cards are out there for the eligible, but may include a higher annual fee, and may only stay low for an introductory period of a few months, and only if you maintain regular payments.


How They Work

For retail merchants, accepting credit cards is a safe bet, because they are a guaranteed form of payment. Unlike checks, which may bounce, payment on a credit card purchase is guaranteed from the bank the instant that the transaction is processed. Merchants pay a fee to the credit card issuers in exchange for being allowed to take their cards, and may be penalized for too many reversed charges or cancelled charges. Unlike in America, merchants in other countries may have an incentive to check the signatures on credit cards – fraudulent purchases will only be paid by the credit issuers if the signature / ID was checked at the time of purchase in some nations.