- A credit card is a method of payment in which a credit card issuer pays the merchant on the customer's behalf and the collects that amount from the card holder. Each credit card issuer determines the rules and procedures for their credit cards. The card holder agrees to these rules and procedures by accepting and using the credit card. A credit card issuer may choose to issue or not issue a card to individuals based on many factors. The most commonly used factor is a credit score.
- Mastercard and Visa are the largest credit card networks, as such their brand and logo is displayed on many cards. However, neither Mastercard nor Visa actually issue credit cards. The electronic networks allow for financial institutions that issue credit cards to have their cards accepted by merchants without having to forge their own agreements with individual merchants. In addition, these networks allow merchants to accept a single agreement to accept all such cards.
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Credit cards are identified by many common features. Credit cards are traditionally the same size and shape for easy identification, although some credit cards are now issued in other shapes and sizes particularly for attachment to a key chain. Each credit card has a front an a back. On the front is the credit card number which is a unique identifier for each card or account. Also, on the front is an expiration date which states when the card is no longer valid. Often the front of the card includes a logo for the issuer or the credit card network to which it belongs. Some cards come with security features on the front in the form of a hologram or picture of the card holder.
The back of the card traditionally contains a magnetic strip which holds an electronic record of the information on the front of the card, plus any additional information included by the issuer. Also on the back is an area for the card holder to sign the card for security purposes. - Credit cards are susceptible to certain kinds of fraud and theft. The information on the magnetic stripe of a credit card is easily copied via swiping the card through a collecting device. In addition, if a card is lost or stolen, an unauthorized user may make purchases with the card by either making purchases where no signature is required, or by copying the signature that is on the back of the card. For merchants, there is a risk that the customer using the card is not legitimate in which case they may not receive payment for purchases made. In addition, a legitimate customer may later dispute the transaction which may also cause the merchant to not be paid.
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Credit cards allow card holders to make purchases without having to carry around the cash or a checkbook. This can be especially useful for purchases that do not take place in person such as telephone transactions or Internet transactions where there is no efficient mechanism for delivering payment without delay. Credit cards also provide the benefit that unlike cash they can be replaced and canceled if lost. If someone loses a $100 bill, there is no recourse for that person, they have simply lost $100. If someone loses a credit card, they can have the card canceled and a new one issued in its place.
Merchants can benefit from having the credit card pre-approved for the purchase and then the funds held for payment. Unlike a check where even if the merchant pre-approves the check there may still not be sufficient funds for payment when the check is submitted to the customer's account. -
There are many types of credit cards, and each has its own rules and fees as determined by its issuer. Many credit cards are attached to a credit line. The card user accesses this credit line by using the card. Thus, the card holder does not have to pre-deposit funds to use the card. The card issuer may charge interest for using the credit line, however, the credit line is sometimes free to use if the card holder pays the full amount charged each month. Some cards, most commonly the basic American Express card, require the balance to be paid in full each month.
Credit cards without a credit line attached to them are known as pre-paid cards and require the card holder to deposit funds with the card issuer prior to making purchases. In addition, the card holder can only make purchases up to the amount of funds currently on deposit with the issuer. - A credit card is used by presenting it to the merchant either in person or by giving the merchant the number on the card. Often, the card holder will sign something to verify that they agree to the purchase and the amount. The merchant then uses this information to collect actual monetary payment from the credit card company for the amount authorized by the card holder. Many merchants use an electronic terminal to both transmit this information to the credit card issuer, and to verify that the credit card is both valid and in good standing for making the purchase. The credit card company may charge the merchant a fee for using the credit card service. The credit card issuer then collects the amount charged from the card holder usually via a monthly bill. The customer may be charged interest for the amount of funds used. Sometimes this interest is waived under certain circumstances usually when the bill is paid completely each month. The credit card company may charge a fee for having the card, most commonly as an annual fee.
