Definition and Issuance of Credit Cards
Definition of a Credit Card
A credit card is a thin rectangular piece of plastic or metal. It is issued by a bank or financial services company. This card lets people borrow money to buy things or take out cash. When a person uses a credit card, they promise to pay back the borrowed amount. They also agree to pay any extra charges like interest. The cardholder can pay back all the money by the next billing date or pay it back over time.
Issuance of Credit Cards
Banks, credit unions, and other financial institutions give out credit cards. To decide if a person can get a credit card, the bank checks their financial information. This includes their credit history, how much money they make, and other details. This helps the bank decide how much money they can lend to the person, also known as the credit limit. Learn more about the issuance process here.
Key Parties Involved
Several important groups are part of the process when you use a credit card. These include:
- Card Issuer: This is the bank or company that gives you the credit card.
- Payment Network: These are companies like Visa, Mastercard, American Express, or Discover. They help process payments between the bank and the merchant.
- Merchant: This is the store or business where you use your card to buy things.
How Credit Cards Work
Revolving Credit Mechanism
Credit cards work on a system called “revolving credit.” This means you can borrow money up to a certain limit. You can spend some of that limit, pay it back, and then borrow again.
- You have a set credit limit
- When you buy something, it reduces your available credit
- When you pay back, your available credit goes up again
- If you pay back on time, your account stays in good standing
Interest Charges and APR
If you don’t pay back all the money you owe by the next billing date, the bank charges you extra money called interest. This interest is calculated using something called Annual Percentage Rate (APR).
- APR is the yearly cost to borrow money
- Different transactions may have different APRs (for example, cash advances may have a higher APR)
- Paying off your balance quickly helps avoid high interest charges
Remember: Interest can add up quickly if you only pay the minimum amount each month.
Payment Processing
When you use your credit card to buy something, several steps happen to make sure the merchant receives the payment and your card gets charged.
- You swipe your card or insert the chip at the store
- The payment network (like Visa or Mastercard) checks the card details
- The network makes sure you have enough credit
- If everything is okay, the payment goes through and the merchant gets the money
- You will see this transaction on your next credit card bill
If you want to learn more about how credit card payment processing works, click here.
Types and Key Features of Credit Cards
Types of Credit Cards
- Rewards Credit Cards: These cards offer value in the form of cash back, points, or miles on everyday purchases. They may also include welcome bonuses and co-branded partnerships with airlines or hotels[1][4][5].
- Secured Credit Cards: These cards require a security deposit, which is often equal to the credit limit, and are designed for individuals with limited or poor credit histories. The deposit is often refunded after the cardholder demonstrates responsible card usage over time[1][4].
- Store Credit Cards: These cards are issued by retailers and can only be used to make purchases from the issuing retailer. They often offer special discounts and promotional notices[1][4].
- Corporate Credit Cards: These cards are issued to employees of sponsoring entities for business purposes, such as travel and entertainment expenses. They often come with specific repayment terms and credit limits set by the sponsoring company[3].
Physical Attributes and Security Measures
Traditional credit cards have a magnetic stripe on the back containing account information, while newer formats include EMV chips, contactless payment options, and biometric payment methods.
- Magnetic Stripe: Stores account information.
- EMV Chips: More secure than magnetic stripes. They create a unique transaction code each time they are used[3][4].
- Contactless Payment: Allows you to pay by simply tapping your card near a payment terminal.
- Biometric Payment Methods: Use fingerprint or face recognition technology.
Security features like CVV codes, signature boxes, and encryption are also included to facilitate secure transactions[3][4].
Additional Benefits
Many credit cards offer extra perks beyond just making purchases. These can vary widely depending on the type of credit card and the issuer[4][5].
- Fraud Protection: Keeps you safe from unauthorized charges.
- Travel Perks: Benefits like travel insurance and access to airport lounges.
- Insurance: Protection for purchases and rentals.
- Customer Service Support: 24/7 help with your account.
To learn more about the benefits and features of credit cards, you can click here.
Understanding these different types and key features can help you choose the right credit card for your needs.