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How Do Credit Cards Work?

How Do Credit Cards Work?A credit card, that rectangular piece of plastic that people carry in their wallet, gives many the freedom to buy products and services they need. This freedom comes with a promise to pay for those products and services. Credit cards, issued by banks and various financial institutions, work very similar to bank accounts. Customers receive credit to borrow money and purchase products. Customers may also choose to take cash from an ATM machine. In either case, the purchase or money taken must be repaid.

Credit cards are a bit different than debit cards. When a debit card is used, money is taken directly from the cardholder’s account. On the other hands, the balance placed on a credit card does not have to paid off each month. However, any unpaid amounts accrue interest. The three major types of credit cards include, MasterCard, Visa and American Express. The logos of these three major credit cards are universally displayed by merchants and indicate a retailer’s willingness to accept a credit card.

Merchant Services Credit Card Processing

Use of a credit card means the cardholder is willing to pay back the card issuer. Consent to pay back is given when the customer enters their personal identification number or signs for the purchase. At the time of purchase, credit cards are validated as having enough money in the account to pay, or not to pay. For transactions where the credit card is not present, merchants will ask for additional information that may include the card’s date of expiration, the customer’s billing address, or the card’s security code (found on the back of the credit card).

Paying the Credit Card Bill

Each month a credit card statement arrives in the mail. It will show all purchases and fees that have incurred. The credit card holder is required to pay the minimum amount by a specific date. Depending on the type credit card, the credit issuer will charge interest on the remaining balance. The interest charged is typically much higher than other forms of debt. A late fee and/or other penalties are imposed if the consumer fails to make his or her payment on time. The credit card holder can choose to have payments automatically deducted from a bank account. Penalties can be avoided as long as there are sufficient funds to cover the payment.

Interest Charges

If the balance on the credit card is not paid in full, interest is charged on the entire outstanding balance from the date of purchase. The method and amount in which interest is charged is detailed in the original credit agreement. Consumers should take time to thoroughly investigate a company’s policies before agreeing to take out a credit card.


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