How Credit Cards Work – The Basics

One red and one blue credit cardWhile credit cards were once considered a luxury for the upper classes, these days most of us relay on them for our daily lives. But many people don’t understand how they work behind the scenes. Basically, a credit card is simply a monetary instrument that can be used in the process of obtaining goods and/or services. Afterwards, the money that was used via the credit card is scheduled to be repaid (plus any accrued additional charges) at the end of the card’s billing cycle which is usually a month in duration. This is the reason why credit cards are generally referred to as “plastic money”. They, more or less, embody the concept of “buy now – pay later”. Sounds pretty simple, right?

Well, there’s more to it than just that. Not all credit cards are the same and it’s important to understand the nuances between them. Not understanding these differences may lead to a situation in which an owner can miss out on significant savings, or worse.

How credit cards actually work

There are generally three participants, when it comes to the way credit cards function. These are the Credit Card Issuer, a company such a Capital One; the Credit Cardholder, you; and a Merchant/Trader/Retailer such as Amazon.com. Let’s take a closer look at these individually.

Credit card issuer – This can be represented by a finance company, a private business entity or a bank. This is where you can usually find significant differences in terms relating to interest charges, benefits and other aspects that involve the relationship between the card issuer and the cardholder. A credit card issuer will typically check an applicants credit report and score before issuing a line of credit to them.

Credit card holder – This is the person or company entity, which has been given permission to utilize the credit that has been extended by the card issuer.

Merchant – The merchant will be the one who is providing the goods and/or services. Before accepting the purchaser’s credit card, it is the responsibility of the merchant to verify the authenticity and validity of the card, along with determining that the presenter of the card is authorized to use that particular card. The merchant then submits a sales voucher to the card issuer for reimbursement, minus a commission fee.

At the end of the credit card billing cycle, a statement is sent to the credit card holder, who may be required to make a payment. This is where we can find some very interesting aspects of the actual cost of the credit line. For more information check out our free credit card guide.

Posted on August 23, 2017 by in Credit Cards

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