How credit cards work

Credit cards are issue after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accept that card.

When a purchase is completed, the credit card user agrees to pay the card issuer. The cardholder indicates his/her approval to pay, by signing a receipt with a proof of the card details and indicating the amount to be paid or by entering a Personal identification number. Also, many merchants now agree to verbal authorizations via telephone and electronic authorization using the Internet, known as a 'Card/Cardholder Not Present' business.

Electronic verification system allows merchants to verify that the card is valid and the credit card client has sufficient credit to cover the purchase in a few seconds, allowing the confirmation to happen at time of purchase. The verification is performing using a credit card payment terminal or Point of Sale system with a transportation link to the merchant's acquiring bank. Data from the card is obtain from a magnetic stripe or chip on the card; the latter scheme is in the United Kingdom and Ireland normally known as Chip and PIN, but is more technically an EMV card.

Other variations of confirmation systems are used by eCommerce merchants to determine if the user's account is valid and able to agree to the charge. These will naturally involve the cardholder providing additional information, such as the safety code printed on the back of the card, or the address of the cardholder.

Each month, the credit card user is sent a report indicating the purchases undertaken with the card, any terrific fees, and the total amount owed. After getting the statement, the cardholder may dispute any charges that he or she thinks are incorrect. Otherwise, the cardholder must pay a definite minimum amount of the bill by a due date, or may choose to pay a higher amount up to the entire quantity owed. The credit provider charges attention on the amount owed. Some financial institution can arrange for automatic expenses to be deduct from the user's bank accounts, thus avoiding late payment overall as long as the cardholder has enough funds.