Think of credit as borrowed money. This money is made available to you, but it must be repaid within an agreed amount of time. Credit cards provide a line of revolving credit. This differs from charge cards, which require that the balance is paid at the end of the month.
Credit cards are obtained based on your ability to repay the borrowed money. The lender is cautious about giving money to a risky borrower, especially since the money is unsecured. A borrower's spending habits are used to determine his or her risk; these are assessed based on his or her credit report. The report is a very important tool that lenders, such as credit card issuers, use to make a decision as to whether to loan you money. The credit report keeps tabs on your credit history. It aggregates your financial information, such as your credit accounts, the account limits and balances, and your repayment history. A numerical rating is applied to your credit history and it is this score that is considered by lenders. The score most traditionally used is the FICO score. (For more insight, read The Importance Of Your Credit Rating.)
Credit cards eliminate the need for carrying cash or checks. A typical plastic card includes the customer's name and a series of numbers that represent the applicable network, bank and account. The numbers in aggregate are referred to as the "account number" or "card number". The front also features the card's expiration date and the issuer's logo. In some countries, the card might also include a photo of the card holder for security.
The back of the card has a horizontal magnetic strip and a signature box that must be signed by the card holder. The account number and a three- to four-digit card identification number or security number are often listed as well.
Credit cards enable you to reserve a hotel room, airline tickets and concert tickets, replace lost or stolen items in person, over the phone or through email. They offer convenience and some special perks for using them, such as travel insurance and gift certificates. They can be used almost everywhere. (For more on possible perks, see Credit Card Perks You Never Knew You Had.)
Credit card companies like VISA (NYSE:V) and MasterCard (NYSE:MA) are commonly associated with credit cards, but they don't issue the cards or loan the money. The two multinational corporations are among the largest retail payment networks. They facilitate the processing of payments between merchants and banks. They also set the transaction terms and fees for merchants and card issuers. Discover (NYSE:DFS), a credit card primarily offered in the U.S., and American Express (NYSE:AXP) also participate in processing transactions, but they issue cards as well.
Credit card issuers are banks, credit unions, savings and loans and other financial institutions. The issuers arrange the card holder's credit agreements, but they must abide by the association's basic standards.
Top 10 Credit Card Issuers
- JPM Chase
- Bank of America
- American Express
- Capital One
- Wells Fargo
- US Bank
- USAA FSB
Source: Creditcards.com (Data as of June 30, 2009)
So what really occurs when you make a purchase? Well, the credit card transaction often takes place within a minute, but it's actually a complex process. When the credit card is swiped through an electronic terminal or sales unit, the credit card account's information is read. The process of authorization can take place several ways but, generally, once it is read a request is sent for the authorization of the sale to the acquiring bank. The acquiring bank then sends the request to the cardholder's issuing bank or card association, such as VISA. The issuing bank creates an approval or denial code. The code is sent back to acquiring bank and then to the electronic terminal. The merchant, typically, will pull out an additional receipt from the register when the process is complete. The receipt will either request your signature or deny your purchase based on the code that was transmitted.
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