When A Purchase Is Made, The Credit Card User Agrees To Pay The Card Issuer

Category: Finance, Credit.

A credit card system is a type of retail transaction settlement and credit system, named after the small plastic card issued to users of the system.

In the case of credit cards, the issuer lends money to the consumer( or the user) . A credit card is different from a debit card in that it does not remove money from the users account after every transaction. It is also different from a charge card( though this name is sometimes used by the public to describe credit cards) , which requires the balance to be paid in full each month. Most credit cards are the same shape and size, as specified by the ISO 7810 standard. In contrast, a credit card allows the consumer to revolve their balance, at the cost of having interest charged. A user is issued a credit card after an account has been approved by the credit provider( often a general bank, but sometimes a captive bank created to issue a particular brand of credit card, such as Wells Fargo or American Express Centurion Bank) , with which the user will be able to make purchases from merchants accepting that credit card up to a pre- established credit limit.

Originally the user would indicate their consent to pay, by signing a receipt with a record of the card details and indicating the amount to be paid, but many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet. When a purchase is made, the credit card user agrees to pay the card issuer. Electronic verification systems allow merchants( using a strip of magnetized material on the card holding information in a similar manner to magnetic tape or a floppy disk) 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. Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, and the total amount owed. Other variations of verification systems are used by eCommerce merchants to determine if the user s account is valid and able to accept the charge. After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect( see Fair Credit Billing Act for details of the US regulations) . The credit provider charges interest on the amount owed( typically at a much higher rate than most other forms of debt) .

Otherwise, the cardholder 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. Some financial institutions can arrange for automatic payments to be deducted from the user s accounts. For example, if a user had a$ 1, 000 outstanding balance and pays it in full, there would be no interest charged. Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid. If, however, even$ 00 of the total balance remained unpaid, interest would be charged on the full$ 1, 000 from the date of purchase until the payment is received. Usually this compartmentalization is the result of special incentive offers from the issuing bank, either to incent balance transfers from cards of other issuers, or to incent more spending on the part of the customer.

The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. (See The TD Gold Travel Visa Cardholder Agreement Retrieved January 3, 2006) The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or possibly with separate credit limits applicable to the various balance segments. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. As the rates and terms vary, services have been set up allowing users to calculate savings available by switching cards, which can be considerable if there is a large outstanding balance. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument. Because of intense competition in the credit card industry, credit providers often offer incentives such as frequent flier points, or cash back, gift certificates( typically 1 percent) to try to attract customers to their program. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged.

Low interest credit cards or even 0% interest credit cards are available. However, services are available which alert credit card holders when their low interest period is due to expire. To compare credit cards. Most such services charge a monthly or annual fee. Grace period. Grace periods vary, but usually range from 10- 25 days depending on the type of credit card and the issuing bank.

A credit card s grace period is the time the customer has to pay the balance, before interest is charged to the balance. The merchant s side. For merchants, a credit card transaction is often more secure than other forms of payment, because the issuing, such as cheques bank commits to pay the merchant the moment the transaction is verified. Even some street market stands now take credit cards. The bank charges a commission( discount fee) , to the merchant for this service and there may be a certain delay before the agreed payment is received by the merchant. In some countries, like the Nordic countries, banks guarantee payment on stolen cards only if ID card is checked.

In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges. In these countries merchants therefore usually ask for ID.

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