How does a Credit Card Work

How does a credit card work is a question to which even those who use credit cards on an all but daily basis may essentially have little idea as to the answer. The overall process of how credit cards work can be an extremely complex concept but to gain a fuller understanding it is important to examine briefly how a credit card works for the consumer, the retailer and the credit card provider.

When the consumer applies for a credit card, they and their financial circumstances will be evaluated by the credit card provider by systems known as credit scoring and credit referencing. A decision will then be made as to whether to approve the application and if so, what the consumer’s credit or spending limit on the card should be. A card and PIN number will then be sent to the new account holder via the post. It is imperative at this stage that the card holder both sign the card and memorise and destroy the note of the PIN.

The card holder will then be free to use their card in a variety of ways, both for purchases and to obtain cash from ATM machines. They should note that it is likely that interest will not be charged on purchases immediately but is likely to be charged from the date of the transaction on cash withdrawals, as a well as a one-off transactional fee being applied.

Every month, the credit card holder will receive a statement regarding their usage of the credit card and their outstanding balance. It is always advisable to clear this balance in full by the payment date specified in order to avoid interest beginning to be charged on the account. Alternatively, there will be a minimum payment amount advised which has to be paid and the credit card holder can simply pay anything between this minimum amount and the full balance outstanding.

When a retailer accepts a credit card for payment, they are essentially taking electronic details from the card, verified by either signature or PIN, for subsequent payment to be made to them by the credit card issuer. Very often, retailers will be charged in this respect by the card issuer and this is why certain credit card purchases – for example, event tickets purchased by phone or online – will incur a fee for payment made by credit card. This is simply the retailer passing on a part of the fee which they will be charged to the consumer.

Credit card providers make their profits in a number of different ways. As well as charging interest on outstanding balances and charging retailers for transactions, credit card providers will levy other fees in certain circumstances. They will charge for cash withdrawals taken on the card, they will charge for late payments made to the account and they will charge where the card holder inadvertently exceeds their authorised credit limit upon the card. The interest charged alone on credit cards is a very profitable concern for credit card providers.

This overview of how credit cards work is not fully comprehensive, of course, as an article of this size does not permit same but hopefully it has provided a rough guide which will be of benefit to all credit card holders and assist them in using their credit cards in the most efficient and prudent fashion.