Credit Card – How does it work?

June 14, 2008

Did you ever think about how your Credit Card works, how a piece of thin plastic makes you able to purchase big costly things and services without any worries of carrying cash and that too at so much of convenience. It means a lot to a great number of people around the globe. Majority of United States Citizens have at least one credit card and usually more than four or five.

These cards also work as your source of Identification, for example if you want to rent a car then you do require a major credit card. Used intelligently this card can give ease, comfort and allows you to make purchases with almost a month to pay for them prior to finance charges put the boot in. This sounds excellent but in reality many card consumers don’t take this benefit as they do carry a balance from month to month and some times even from year to year. Carrying a balance on your credit card may cost you a whooping 24 percent of charge. Most of the people find it very hard to resist themselves from using this piece of plastic.

We will discuss History and technical things behind a Credit Card. Starting from the scratch a credit card is thin piece of plastic, typically 3-1/8 inches by 2-1/8 inches in size, which contains ID information like a signature or photo, and authorizes the individual printed on it to charge for purchase or services to his account. Today, the information on the card can be read and used on ATMs, store readers and Internet. Users pay out their bills on a monthly or yearly basis plus the annual fees. The earliest Credit Card that could be used on variety of stores and businesses was introduced by Diners Club in 1950 and after eight years American Express came with its universal credit card called “Don’t Leave Home without it!” and then came the Bank of America in 1959 which was renamed as Visa later on. Master Card followed them with the name of Master Charge earlier.

Now the Credit Card Number system, although the associated cards like departmental card have their own numbering system but ANSI standard is used by most of the national card systems. A total of 16 digits are there on front of Cards. The first digit in Credit Card Number signifies the system:

3 – American Express and Diners Cub

4 – Visa

5 – Master Card

6Discover Card

Usually, digits from two to six stands for Bank Number, digits from seven to fourteen stands for Account Number and last digit is a check digit. This system varies from bank to bank.

When a purchase is completed, the credit card consumer agrees to pay the card issuer. The cardholder indicates his/her approval to pay, by signing a receipt with a record of the card details and signifying the amount to be paid or by entering a Personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a ‘Card/Cardholder Not Present’ (CNP) transaction.

Electronic authentication systems allow merchants to confirm that the card is valid and the credit card customer has enough credit to cover the purchase, allowing the verification to happen at time of purchase. The authentication 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 or chip on the card.

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