| A credit card is a system of payment, named | | | | (typically at a much higher rate than most |
| after the small plastic card issued to users | | | | other forms of debt). Some financial |
| of the system. A credit card is different | | | | institutions can arrange for automatic |
| from a debit card in that it does not remove | | | | payments to be deducted from the user's |
| money from the user's account after every | | | | accounts. |
| transaction. In the case of credit cards, the | | | | |
| issuer lends money to the consumer (or the | | | | Credit card issuers usually waive interest |
| user). It is also different from a charge | | | | charges if the balance is paid in full each |
| card (though this name is sometimes used by | | | | month, but typically will charge full |
| the public to describe credit cards), which | | | | interest on the entire outstanding balance |
| requires the balance to be paid in full each | | | | from the date of each purchase if the total |
| month. In contrast, a credit card allows the | | | | balance is not paid. |
| consumer to 'revolve' their balance, at the | | | | |
| cost of having interest charged. Most credit | | | | For example, if a user had a $1,000 |
| cards are the same shape and size, as | | | | outstanding balance and pays it in full, |
| specified by the ISO 7810 standard. | | | | there would be no interest charged. If, |
| | | | however, even $1.00 of the total balance |
| A user is issued a credit card after an | | | | remained unpaid, interest would be charged on |
| account has been approved by the credit | | | | the full $1,000 from the date of purchase |
| provider (often a general bank, but sometimes | | | | until the payment is received. The precise |
| a captive bank created to issue a particular | | | | manner in which interest is charged is |
| brand of credit card, such as Wells Fargo or | | | | usually detailed in a cardholder agreement |
| American Express Centurion Bank), with which | | | | which may be summarized on the back of the |
| the user will be able to make purchases from | | | | monthly statement. |
| merchants accepting that credit card up to a | | | | |
| pre-established credit limit. | | | | The credit card may simply serve as a form of |
| | | | revolving credit, or it may become a |
| When a purchase is made, the credit card user | | | | complicated financial instrument with |
| agrees to pay the card issuer. The cardholder | | | | multiple balance segments each at a different |
| indicates their consent to pay, by signing a | | | | interest rate, possibly with a single |
| receipt with a record of the card details and | | | | umbrella credit limit, or with separate |
| indicating the amount to be paid or by | | | | credit limits applicable to the various |
| entering a PIN. Also, many merchants now | | | | balance segments. Usually this |
| accept verbal authorizations via telephone | | | | compartmentalization is the result of special |
| and electronic authorization using the | | | | incentive offers from the issuing bank, |
| Internet, known as a customer not present | | | | either to encourage balance transfers from |
| (CNP) transaction. | | | | cards of other issuers, or to encourage more |
| | | | spending on the part of the customer. In the |
| Electronic verification systems allow | | | | event that several interest rates apply to |
| merchants to verify that the card is valid | | | | various balance segments, payment allocation |
| and the credit card customer has sufficient | | | | is generally at the discretion of the issuing |
| credit to cover the purchase in a few | | | | bank, and payments will therefore usually be |
| seconds, allowing the verification to happen | | | | allocated towards the lowest rate balances |
| at time of purchase. The verification is | | | | until paid in full before any money is paid |
| performed using a credit card payment | | | | towards higher rate balances. Interest rates |
| terminal or Point of Sale (POS) system with a | | | | can vary considerably from card to card, and |
| communications link to the merchant's | | | | the interest rate on a particular card may |
| acquiring bank. Data from the card is | | | | jump dramatically if the card user is late |
| obtained using from a magnetic stripe or chip | | | | with a payment on that card or any other |
| on the card; the later system is commonly | | | | credit instrument, or even if the issueing |
| known as Chip and PIN, but is more | | | | bank decides to raise its revenue. As the |
| technically an EMV card. | | | | rates and terms vary, services have been set |
| | | | up allowing users to calculate savings |
| Other variations of verification systems are | | | | available by switching cards, which can be |
| used by eCommerce merchants to determine if | | | | considerable if there is a large outstanding |
| the user's account is valid and able to | | | | balance (see external links for some on-line |
| accept the charge. These will typically | | | | services). |
| involve the cardholder providing additional | | | | |
| information, such as the security code | | | | Because of intense competition in the credit |
| printed on the back of the card, or the | | | | card industry, credit providers often offer |
| address of the cardholder. | | | | incentives such as frequent flier points, |
| | | | gift certificates, or cash back (typically up |
| Each month, the credit card user is sent a | | | | to 1 percent based on total purchases) to try |
| statement indicating the purchases undertaken | | | | to attract customers to their program. |
| with the card, any outstanding fees, and the | | | | |
| total amount owed. After receiving the | | | | Low interest credit cards or even 0% interest |
| statement, the cardholder may dispute any | | | | credit cards are available. The only downside |
| charges that he or she thinks are incorrect | | | | to consumers is that the period of low |
| (see Fair Credit Billing Act for details of | | | | interest credit cards is limited to a fixed |
| the US regulations). Otherwise, the | | | | term, usually between 6 and 12 months after |
| cardholder must pay a defined minimum | | | | which a higher rate is charged. However, |
| proportion of the bill by a due date, or may | | | | services are available which alert credit |
| choose to pay a higher amount up to the | | | | card holders when their low interest period |
| entire amount owed. The credit provider | | | | is due to expire. Most such services charge a |
| charges interest on the amount owed | | | | monthly or annual fee. |