How credit cards work
A user is issued credit after an account has been approved by the credit provider, and is given a credit card, with which the user will be able to make purchases from merchants accepting that credit card up to a pre-established credit limit. Often a general bank issues the credit, but sometimes a captive bank created to issue a particular brand of credit card, such as Chase, Wells Fargo or Bank of America, issues the credit.
When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates their consent to pay, by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a Personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a ‘Card/Cardholder Not Present’ (CNP) transaction.
Electronic verification systems allow merchants to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or Point of Sale (POS) system with a communications link to the merchant’s acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is in the United Kingdom commonly known as Chip and PIN, but is more technically an EMV card.
Other variations of verification systems are used by eCommerce merchants to determine if the user’s account is valid and able to accept the charge. These will typically involve the cardholder providing additional information, such as the security code printed on the back of the card, or the address of the cardholder.
Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed. After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect (see Fair Credit Billing Act for details of the US regulations). Otherwise, the cardholder must pay a defined minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the entire amount owed. The credit provider charges interest on the amount owed (typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for automatic payments to be deducted from the user’s bank accounts, thus avoiding late payment altogether as long as the cardholder has sufficient funds.
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.
For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made that the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid…i.e. when the balance stopped revolving).[1]
The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, either to encourage balance transfers from cards of other issuers, or to encourage more spending on the part of the customer. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue. As the rates and terms vary, services have been set up allowing users to calculate savings available by switching cards, which can be considerable if there is a large outstanding balance (see external links for some on-line services).
Because of intense competition in the credit card industry, credit providers often offer incentives such as frequent flyer points, gift certificates, or cash back (typically up to 1 percent based on total purchases) to try to attract customers to their program.
Low interest credit cards or even 0% interest credit cards are available. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. However, services are available which alert credit card holders when their low interest period is due to expire. Most such services charge a monthly or annual fee.
Grace period
A credit card’s grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 30 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met. Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charge(s) incurred depends on the grace period and balance, with most credit cards there is no grace period if there’s any outstanding balance from the previous billing cycle or statement (i.e. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.
The merchant’s side
For merchants, a credit card transaction is often more secure than other forms of payment, such as cheques, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on their credit card payment (except for legitimate disputes, which are discussed below, and can result in charge backs to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant’s employees and reduce the amount of cash on the premises.
For each purchase, the bank charges the merchant a commission (discount fee) for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to compensate for the transaction costs, though this is not always allowed by the credit card consortium.
In some countries, like the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card’s PIN code for identification, and in that case showing an ID card is not necessary.
Parties involved
- Cardholder: The owner of the card used to make a purchase; the consumer.
- Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case.
- Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder
- Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.
- Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.
- Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.
- Credit Card association: An association of card-issuing banks such as Visa, MasterCard, Discover, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.
- Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks. Transaction processing networks include: Cardnet, Nabanco, Omaha, Paymentech, NDC Atlanta, Nova, Vital, Concord EFSnet, and VisaNet.[2]
- Affinity partner: Some institutions lend their name to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities and charities.
The flow of information and money between these parties — always through the card associations — is known as the interchange, and it consists of a few steps.
Secured credit cards
A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. Typically, the cardholder must deposit between 100% and 200% of the total amount of credit desired. Thus if the cardholder puts down $1000, he or she will be given credit in the range of $500–$1000. In some cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases, the deposit required may be significantly less than the required credit limit, and can be as low as 10% of the desired credit limit. This deposit is held in a special savings account. Credit card issuers offer this as they have noticed that delinquencies were notably reduced when the customer perceives he has something to lose if he doesn’t repay his balance.
The cardholder of a secured credit card is still expected to make regular payments, as he or she would with a regular credit card, but should he or she default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows for building of positive credit history.
Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be debited simply for missing one or two payments. Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency (150 to 180 days). This means that an account which is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance which is much higher than the actual credit limit on the card. In these cases the total debt may far exceed the original deposit and the cardholder not only forfeits their deposit but is left with an additional debt.
Most of these conditions are usually described in a cardholder agreement which the cardholder signs when their account is opened.
Secured credit cards are an option to allow a person with a poor credit history or no credit history to have a credit card which might not otherwise be available. They are often offered as a means of rebuilding one’s credit. Secured credit cards are available with both Visa and MasterCard logos on them. Fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards, however, for people in certain situations, (for example, after charging off on other credit cards, or people with a long history of delinquency on various forms of debt), secured cards can often be less expensive in total cost than unsecured credit cards, even including the security deposit.
Sometimes a credit card will be secured by the equity in the borrower’s home.[3][4] This is called a home equity line of credit (HELOC).
For more – http://en.wikipedia.org/wiki/Credit_card
Instant Approval Credit Cards
For those who live in the fast-paced world of today there is now a credit card that meets your needs. If you don’t have the time to wait for credit card approval then an instant approval credit card might be the route to take. A lot of people don’t have the time or patience for the dated method of applying for a credit card. Traditionally you have to fill out an application, mail it in, and wait for a letter advising you if you have been approved for a line of credit.
What happens when you don’t have the luxury of time to get approved for a credit card? This is where an instant approval card comes in handy. Companies that offer instant approval credit cards provide an online link to their application. No more filling out your application by hand and sending it off in a stamped envelope. Now with a click of your mouse you can access the application, fill it out, and submit it.
Not only do you get rid of the time consuming forms and submissions, you can also say goodbye to waiting to be informed of your approval status. After submitting your application for your instant approval credit card you will be notified in minutes of whether you have been approved or not. Going through an instant approval credit card does not diminish your options on what type of credit card you can apply for. Credit card companies offer a variety of choices in addition to this hassle free method. You can choose from gas credit cards, rewards credit cards, or cash back incentives. This is an option that doesn’t have any downfalls. You are able to be approved instantly and still have many of the choices with regular credit cards.
Such cards offered through the instant approval method are the Chase Visa® Platinum Card, Discover® More (SM) Card, Chase Free Cash Rewards Visa Card, Discover® Open Road(SM) Card, Blue from American Express, Chase Freedom Cash Visa Signature Card, Blue Cash from American Express, American Express Preferred Rewards Green Card, Clear from American Express, and Miles by Discover® Card. Talk about a multitude in credit card options. You still maintain the same selection without having to have the patience on waiting days or even weeks for some type of notification in the mail.
So what if you aren’t approved for a credit card through cards with instant approval? You still have opportunities, just possibly through a different type of credit card. The days of getting declined and experiencing the despair of not being able to benefit from a credit card are over. Many of the companies mentioned above have come up with a solution to being declined. When you seek a credit card through instant approval you will know immediately if you are declined. If so you may want to seek a prepaid credit card. You can be instantly approved and in the case of many cards offered can even benefit from some of the rewards credit cards or those that offer cash back incentives, all through a prepaid credit card.
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bestcreditcardratings.com/instant-approval-cards
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Credit Card Balance Transfer Offer – What You Need To Know
If you’re looking to reduce your monthly debt payments and free up more cash, then a credit card transfer to a lower interest rate may be a good option. There are many different types of balance transfer offers available. The sheer number available can be overwhelming and sometimes just the thought of selecting the perfect one is daunting. The actual task can seem impossible.
To make this task a little less overwhelming, it helps to understand this type of card. It’s also important to know the different types of balance transfers available on charge cards.
How Does This Type of Card Work?
To begin to understand balance transfer credit cards, you need to know how they work.
The way this type of plastic money works is fairly simple. If you have a balance on one credit card, you can sign up for a new card and then transfer the original amount to it. Most charge card issuers are happy to accept your plastic debt from another company. They want your business and will make the idea of a money transfer as appealing as possible.
Low interest rates and rewards perks are some of the benefits used to entice new customers. But you should be aware that even with all these great sounding bonuses, balance transfers can end up being very expensive if they’re not done right.
Exercise Caution
The most common balance transfer offer is the one where you’re offered a super-low introductory rate on transfers. An example of this type of card is the Blue from American Express. It has an introductory transfer rate of 4.99%.
The Blue from American Express, unless some other cards, fixes this interest rate for the life of the balance. Some other credit cards may increase the interest rate after the introductory time frame ends, which could last anywhere between six to 15 months. For this reason, it’s always important to read the fine print to make sure you’re getting exactly what you want.
You should also remember that not everyone qualifies for the advertised low interest rates. While the advertised rate may be appealing, the reality is that only a few with exceptionally stellar credit scores will qualify for the posted rate. The best way to increase your chances of qualifying for the lowest rate possible is to make sure you make your minimum payments on time for all your current charge cards and other debts. If you can pay more than the minimum, then you should do that.
Another thing to watch out for are hefty transfer fees. Some charge cards will make you pay for the privilege of transferring your balance to them. A few issuers charge fees that are a percentage of the transferred amount, while others cap fees anywhere from $35 to $80.
Howard Strong, author of What Every Credit Card User Needs to Know warns that companies often have sneaky conditions. “You need to be extremely cautious,” he has been quoted as saying. You’ll have to decide for yourself if transfer fee is worth the interest rate you qualify for. Do the math. A 5% transfer charge fee will mean that you’ll pay an additional $50 for every thousand dollars you transfer.
Avoid the cards that charge hefty fees.
After the Transfer
So, you’ve done your research and found the perfect card for your needs. You’ve gone through the application process, been accepted for the interest rate you can live with, and are waiting for the balance transfer to go through.
The biggest mistake too many people make while they wait for the transfer to take effect is that they forget to continue making minimum payments on their old card/cards. If you do not make your minimum payments, this could have a negative impact on your credit score. A single late or missed payment is all some credit card issuers need as an excuse to increase your interest rates. Once the balance has been transferred, close your old ones so you’re not tempted to continue to use them. Then begin paying as much as you can on your new card so that you can eliminate your debt.
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Marc Ilgen is an internet entrepreneur and author. He runs a website called Credit-Card-Apply-Online-Here.com to help people apply online for a credit card. His website also lets viewers compare some terrific credit card offers for people who want a balance transfer credit card.
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Posted by yesclips 
