How Does A Credit Card Work

Let’s first take a look at the players involved in the whole credit card business.

• Cardholder: The person who actually possesses the credit card and uses it to pay for transactions.
• Card issuing bank: The institution that has issued the credit card. It extends the line of credit on the credit card and guarantees payment on transactions made using the card.
• Merchant: The person who accepts payment through the credit card in return for goods and services.
• Acquiring bank: The institution that provides the merchant the facility to accept credit cards. The settlement of all transactions made at the merchant’s shop is done through this bank.
• Card: The network of several banks that helps facilitate credit card transactions, for example, Visa, MasterCard and so on.

How does a credit card actually work? Suppose you go shopping for clothes. You decide to pay through your credit card instead of using cash. This is what happens:

• You hand over your credit card to the merchant.
• The merchant runs it through his card swiping machine.
• The machine reads the data on the credit card and transmits the same to the acquiring bank, which has provided the machine to the merchant.
• The acquiring bank then transmits the data to the card association which in turn passes it to the card issuing bank.
• The card issuing bank on receiving the data checks whether the credit card is eligible for the requested amount of credit and sends the information back through the same route. All this happens in a matter of seconds.
• Once your bank has verified that you are eligible for the amount of credit requested, you are free to walk away with your newly-bought clothes.
• The merchant is paid the money by his bank which in turn collects the same from your bank. Both your bank and the merchant’s bank make a small commission on the transaction which results in the merchant getting paid a lesser amount than what he billed you. And you end up with free credit which is actually financed by the merchant. Once you know the manner in which the process is being done for a transaction there is also a need to know the various variants in the use of a credit card. This will help you in knowing the exact steps that have to be taken while making different uses of your credit card.

Once you know the manner in which the process is being done for a transaction there is also a need to know the various variants in the use of a credit card. This will help you in knowing the exact steps that have to be taken while making different uses of the card.

Using the card on the Internet

In case of a physical transaction, the person at the sale counter has the necessary machine present with him/her that he/she will use to swipe the credit card. This machine tells whether the transaction for the specific amount can be processed using the credit card. In case of a transaction on the Internet, there is no one to whom the credit card can be handed over physically. In such a situation, there has to be some additional information to be provided by the card holder. This is nothing but the same information that is read by the card reader when the credit card is swiped through the machine because the information is present on the magnetic stripe present on the back of the card.

Using a credit card on the Internet requires the input of the 16-digit card number. This has to be followed by the type of association for that particular card. This can be Visa, MasterCard or American Express. The date on which the credit card expires is also required. This is mentioned on the front of the credit card in terms of month and year. Finally, the most important information that is required is the CVV number. This is a secret three-digit number that is mentioned on the back of the credit card just below the magnetic stripe. In many cases, there is a four-digit number which forms part of the credit card number, mentioned before the number but this does not form part of the CVV number. Since this is found mentioned on the credit card it is assumed that only the owner of the card has access to the number. That is also the reason why this number has to be guarded carefully so that others do not have access to it because otherwise this can be misused to buy things on the Internet when the credit card is still with the owner.

Using the credit card in an ATM

Another place where a credit card can be used is an ATM where cash can be withdrawn using the card. But there is no free credit period on these cash withdrawals. They also attract interest from day one, which is generally higher, ranging from 26% to 45% annually. Plus, there is also a withdrawal fee of around 2% to 3% of the amount withdrawn. While this is a very expensive option to get cash there might be times when this has to be done. The first thing to do in such a situation is to find a compatible ATM where this can be used. This is usually the ATM of the card issuing bank plus the other ATM where credit cards of a particular association can be accepted. Once this is done the next thing is to enter the PIN which has come along with the credit card. This is a separate number that is issued when the credit card comes to the owner and the PIN is sent in a separate envelope. This is the only place where the PIN will be useful and hence this has to be remembered. Once this is entered then using the ATM and following the instructions on the machine the required amount of cash can be withdrawn.