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How Credit Cards Work

A credit card user is issued the card after approval from a provider (often a general bank, but sometimes from a captive bank created to issue a particular brand of credit card, such as American Express Centurion Bank), in which they will be able to make purchases from merchants supporting that credit card up to a pre-negotiated credit limit. When a purchase is made, the credit card user indicates his/her consent to pay, usually by signing a receipt with a record of the card details and indicating the amount to be paid. More recently, electronic verification systems have allowed merchants (using a strip of magnetized material on the card holding information in a similar manner to magnetic tape or a floppy disk) 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. Some services can be paid for over the telephone by credit card merely by quoting the number embossed onto the card (the credit card number), and they can be used in a similar manner to pay for purchases from online vendors.

Credit Card Payments and Billing
Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, and the total amount owing. The cardholder must then pay a minimum proportion of the bill by a due date, and may choose to pay more or indeed pay the entire amount owing. The credit provider charges interest on the amount owing (typically at a much higher rate than most other forms of debt). Credit card issuers may waive interest charges if the balance is paid in full each month, which allows the credit card to serve as a form of revolving credit, or they may choose to apply any payments toward recent rather than previous debt. 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. As the rates and terms vary, services have been set up allowing users to calculate savings available by switching card, which can be considerable if there is a large outstanding balance.

Because profit margins in the credit card industry can be quite high, credit providers often offer incentives such as frequent flier miles, gift certificates, or cash back (typically 1 percent) to attract customers to their program.

Secured Credit Cards
A secured credit card is a special type of credit card in which you must first put down a deposit between 100% and 150% of the total amount of credit you desire. Thus if the holder puts down $1500, he or she will be given credit in the range of $1000–$1500. This deposit is held in a special savings account. The owner of the secured credit card is still expected to make regular payment, as he or she would with a regular credit card, but should he or she default on a payment, the card issuer can deduct payments on the card out of the deposit. Secure credit cards are an advantage to anyone with poor or no credit history. They are often offered to people as a means of rebuilding one's credit. Secured credit cards are available with both Visa and MasterCard logos on them.

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This article is licensed under the GNU Free Documentation License.

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