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