Credit card

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

When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates his/her consent to pay, by signing a receipt with a record of the card details and indicating 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 verification systems allow merchants 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. The verification 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; the latter system is in the United Kingdom and Ireland commonly known as Chip and PIN, but is more technically an EMV card.

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. These will typically involve the cardholder providing additional information, such as the security code printed on the back of the card, or the address of the cardholder.

Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed. 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). 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. The credit provider charges interest on the amount owed if the balance is not paid in full (typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for automatic payments to be deducted from the user's bank accounts, thus avoiding late payment altogether as long as the cardholder has sufficient funds.

Interest charges

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.

For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. 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. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as RRFC or residual retail finance charge. Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid...i.e. when the balance stopped revolving).

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 with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. 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. 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 , or even if the issuing bank decides to raise its revenue.

Benefits to customers

Because of intense competition in the credit card industry, credit card providers often offer incentives such as frequent flyer points, gift certificates, or cash back (typically up to 1 percent based on total purchases) to try to attract customers to their programs.

Low interest credit cards or even 0% interest credit cards are available. 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. However, services are available which alert credit card holders when their low interest period is due to expire. Most such services charge a monthly or annual fee.

Grace period

A credit card's grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 40 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met.

Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance; with most credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement (i.e. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.

Benefits to merchants

For merchants, a credit card transaction is often more secure than other forms of payment, such as checks, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment (except for legitimate disputes, which are discussed below, and can result in charges back to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises. Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk.

For each purchase, the bank charges the merchant a commission (discount fee) for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. 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 as a result of disputes. Some small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to compensate for the transaction costs, though this is not always allowed by the credit card consortium.

In some countries, for example the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card's PIN for identification, and in that case showing an ID card is not necessary.

Parties involved

• Cardholder: The holder of the card used to make a purchase; the consumer.
• Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case.
• Merchant: The individual or busine
  
  
  Zerth asked: "I recently bought a prepaid credit card with 50 dollars on it, I went to paypal to put the card on it but it said the card is denied, I did some searching and found an article that said most big business wont accept prepaid cards because the money can be spent before they bill the card (garbage). So.. is there some way to get a prepaid card on paypal?"

  Question posted courtesy of:

  itsmekatiebeth replied: "Yes there is a way for you get a prepaid credit card with your name on it. Its take 7-10 days and its is a credit card.It cost like 10.00 please see walmart dealer orI hope it works.If you have a bank card visa that will work also."

  GREGORY J replied: "I hope my suggestion might be helpful,though you need to make the judgement yourself.I have tried this good resource.http://creditcard.expertips.info/0-apr-visa-credit-card.html"

  SeekingClarity asked: "I want to get a prepaid credit/debit card for a friend as a gift. But I was wondering if I could purchase one and add money to it using my credit card? If so, is there a prepaid card where there is no shipping or handling and i can receive it instantly?"

  Question posted courtesy of:

  web replied: "as i know you can not purchase a prepaid credit card with your master card, they only take cash for prepaid credit card."

  Jon K replied: "No, they can only be purchased/loaded with cash, or also loaded via direct deposit from your employer. As far as no shipping handling, I think they are all sent out regular mail for free. Instantly meaning what? Card number right now, no you'd have to wait till the card came."

  akisukp replied: "maybe all credit cards is the answer?"

  Marz asked: "Can a minor apply for a prepaid credit card (specifically a internationally recognized one) in the Philippines? I know prepaid cards exists but are they available in the Philippines as well?"

  Question posted courtesy of:

  philbertpheinstein replied: "I don't think so.."

  Cliff T asked: "I am trying to start shopping for Christmas online and I don't have a credit card and a couple of the sites won't let me use prepaid credit cards I was wondering if there was a prepaid credit card that acted like a real credit card and won't be denied by any sites that restrict prepaid cards?"

  Question posted courtesy of:

  Recky replied: "You shouldn't have any problems with a Visa debit card. What kind of card are you using?Here's a link to Visa debit to see how it works"

  bandgiramos replied: "don't know the answer to that 1 but most banks will let u open a checking account 4 as little as 50 bucks. when u open 1 up, u will get a check cashing card which acts just like a visa/master card. i would inquire about it. peace"

  bastetg4 replied: "A debit card should work--I've been using my MasterCard branded debit card online for years. However, there are occasionally sites that say they don't take debit cards. In that case, you could try getting a secured credit card. You make a deposit to the bank which becomes the limit of the card (you can't touch that money, so make sure you can afford it). So if you put $500 on a secured card, you would have a credit card with a $500 limit. After a year or less, the secured card will become unsecured and you get your deposit back and it becomes a regular credit card. It reports as a regular card to the credit bureaus too, so no one would know it's a secured card but you. Bank of America has one that is supposed to be very good.You could also try shopping through sites that use Paypal--you can have Paypal draw directly from your checking account."

  Farrel L asked: "Can Prepaid card be used like Visa Buxx and other to order something online? They ask you for the credit card number and expiration date, does the Visa buzz and other prepaid credit card has it printed on the card?"

  Question posted courtesy of:

  Old Kid replied: "As long as it is a valid Visa or Master card etc. yes"

  smarthomeincome.ws replied: "yes you can aslong as the card doesnt have any restrictions some will exclude things such as paying at the pumps for gas etc.. but they have exp. date and the 3 didget code on the back.Tyler K "