Understand How Credit Cards Work

Wednesday, May 16, 2012, 2:00 AM | Leave Comment

In addition to convenience and accessible credit, credit cards offer consumers an easy way to track expenses, which is necessary for both monitoring personal expenditures and the tracking of work-related expenses for taxation and reimbursement purposes. Credit cards are accepted worldwide, and are available with a large variety of credit limits, repayment arrangement, and other perks.

When you receive your Credit Card

Credit cards are issued after an account has been approved by the credit provider, most probably but not necessarily a bank, after which cardholders can use it to make purchases at merchants accepting that card.

When you make a purchase

When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates his/her 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).

That means you have borrowed money from the credit card issuer for a certain period of time. In other words, the issuer owns the money and you are renting it. We all know, when you rent something, you have to return it to the original owner so that someone else can rent it.

Your credit card is verified

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.

When you receive your bill

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.

Any billing errors?

After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect. There is a Fair Credit Billing Act (FCBA) which is a United States federal law enacted as an amendment to the Truth in Lending Act. The basic purpose of FCBA is to protect consumers from unfair billing practices and to provide a mechanism for addressing billing errors in “open end” credit accounts, such as credit card or charge card accounts.

Billing is free of errors

If the cardholder have no dispute over the bill, he/she 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.

Issuer charges interest

The credit provider charges interest on the amount owed if the balance is not paid in full – typically at a much higher rate than most other forms of debt.

Automatic payments

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.

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