Transactions involving credit cards or automated clearing houses (ACH) are electronic funds transfers (EFTs). Many vendors and consumers prefer to make electronic transfers rather than use paper checks or cash. ACH items draw on funds in checking accounts. Credit cards are revolving debt instruments that enable people to use borrowed money to make purchases. Credit card issuers assign each cardholder a credit limit. Cardholders make monthly payments to clear the debt.
The National Automated Clearing House Association (NACHA) began operations in 1974 with the aim of encouraging banks to develop new methods for transmitting funds electronically. The NACHA succeeded in its quest and in 1978 Congress passed the Electronic Funds Transfer Act to regulate the growing EFT market. In 1996, Congress passed Regulation E, which established guidelines for the processing of electronic transactions involving credit and debit cards. In 2004, the Check 21 Act enabled banks to turn paper checks into ACH items.
Consumers use credit cards for signature or personal-identification-number based transactions that run through point-of-sale machines. Credit cards carry the logo of a bank-card network operator, such as Visa or MasterCard. Cardholders can use the cards at any vendors that display the network logo.
ACH transactions include direct deposits, electronic checks, Internet-based transactions and electronic business-to-business funds transfers. People can establish one-time or recurring ACH transfers.
ACH items are processed the day the transaction occurs, which means the payee does not have to experience a delay in receiving funds. Banks can place stop payments on prearranged ACH payments if the account holder makes the request at least three business days before the payment date.
Generally, when vendors process credit-card payments the card issuer places a hold equal to the transaction amount on the cardholder's account the same day that the transaction occurs. Some vendors use older payment machines that take two or three days to process transactions.
ACH payments principally benefit payees who gain fast access to funds. Check deposits can take up to nine business days to clear, whereas a check in electronic form clears an account instantly.
Credit cards enable people to make purchases when they lack sufficient funds in their checking accounts. Many credit cards have reward programs that award air miles or retail gift cards to customers whenever they use their cards.
Most credit cards have variable interest rates that card issuers can raise at any time as long as they give the cardholder 45 days advance notice. Fixed-rate credit cards have interest rates tied to the Prime Rate. They are called "fixed rates" because the margin between Prime and the cards' interest rate never changes, but given that the Prime Rate changes, they are not truly "fixed rate" cards.
Employers normally need two weeks' notice to change ACH direct deposit payments. This creates problems for people who need to close bank accounts quickly because of fraud.