Credit card : Credit card Presented by,
Manju S About credit cards : 1. How credit cards work
2. Interest charges
3. Benefits to customers
4. Grace period
5. Benefits to merchants
6. Parties involved
7. Transaction steps
9. Fees charged to customers
10.Credit cards in ATMs
12.Types of cards in INDIA About credit cards Credit cards : Credit cards A credit card is part of a system of payments after the small plastic card issued to users of the system.
It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services.
The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.
Most credit cards are issued by local banks or credit unions, and are the shape and size specified by the ISO/IEC 7810 standard as ID-1. This is defined as 85.60 × 53.98 mm in size Credit cards : Credit cards Issuing bank logo
EMV chip on "smart cards"
Credit card number
Card brand logo
Card Holder Name
contactless chip Credit card numbering : Credit card numbering The card number's prefix, called the Bank Identification Number, is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs.
This is the first six digits for MasterCard and Visa cards.
The next nine digits are the individual account number.
And the final digit is a validity check code.
In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and security codes. Not all credit cards have the same sets of extra codes nor do they use the same number of digits. Credit card numbering : Credit card numbering An example of the reverse side of a typical credit card:
Card Security Code How credit cards work : How credit cards work 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 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. How credit cards work : How credit cards work 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.
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. How credit cards work : How credit cards work 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.
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 issuer 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). Interest charges : Interest charges Credit card issuers usually waive(not-claim) 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 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. Interest charges : Interest charges 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 : Benefits to customers The main benefit to each customer is convenience.
Compared to debit cards and cheques, a credit card allows small short-term loans to be quickly made to a customer who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card.
Credit cards also provide more fraud protection than debit cards.
In the UK for example, the bank is jointly liable with the merchant for purchases of defective products over £100. Benefits to customers : Benefits to customers Many credit cards offer rewards and benefits packages, such as offering enhanced product warranties at no cost, free loss/damage coverage on new purchases, and points which may be redeemed for cash, products, or airline tickets.
Additionally, carrying a credit card may be a convenience to some customers as it eliminates the need to carry any cash for most purposes. Grace period : Grace period A credit card's grace period is the time the customer has to pay the balance before interest is assessed on the outstanding balance.
Grace periods vary, but usually range from 20 to 50 days depending on the type of credit card and the issuing bank.
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 : Benefits to merchants For merchants, a credit card transaction is often more secure than other forms of payment, cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises.
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 (interchange rate).
Some small merchants require credit purchases to have a minimum amount to compensate for the transaction costs. Parties involved : 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.
Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.
Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.
Independent sales organization: Resellers (to merchants) of the services of the acquiring bank. Parties involved : Parties involved Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.
Credit Card association: An association of card-issuing banks such as Visa, MasterCard, Discover, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.
Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks. Transaction steps : Transaction steps Authorization: The cardholder pays for the purchase and the merchant submits the transaction to the acquirer (acquiring bank).
The acquirer verifies the credit card number, the transaction type and the amount with the issuer (Card-issuing bank) and reserves that amount of the cardholder's credit limit for the merchant.
An authorization will generate an approval code, which the merchant stores with the transaction. Transaction steps : Transaction steps Batching: Authorized transactions are stored in "batches", which are sent to the acquirer.
Batches are typically submitted once per day at the end of the business day.
If a transaction is not submitted in the batch, the authorization will stay valid for a period determined by the issuer, after which the held amount will be returned back to the cardholder's available credit. Transaction steps : Transaction steps Clearing and Settlement: The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer.
Essentially, the issuer pays the acquirer for the transaction.
Funding: Once the acquirer has been paid, the acquirer pays the merchant.
The merchant receives the amount totaling the funds in the batch minus either the "discount rate," "mid-qualified rate", or "non-qualified rate" which are tiers of fees the merchant pays the acquirer for processing the transactions. Transaction steps : Transaction steps Charge backs: A chargeback is an event in which money in a merchant account is held due to a dispute relating to the transaction.
Charge backs are typically initiated by the cardholder.
In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution.
The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.
A merchant is responsible for the chargeback only if he/she has violated the card acceptance procedures as per the merchant agreement with card acquirers. Rewards : Rewards Many credit card customers receive rewards, such as frequent flyer points, gift certificates, or cash back as an incentive to use the card.
Rewards are generally tied to purchasing an item or service on the card, which may or may not include balance transfers, cash advances, or other special uses.
Depending on the type of card, rewards will generally cost the issuer between 0.25% and 2.0% of the spread.
Networks such as Visa or MasterCard have increased their fees to allow issuers to fund their rewards system.
Some issuers discourage redemption by forcing the cardholder to call customer service for rewards. Fees charged to customers : Fees charged to customers Late payments or overdue payments
Charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake), called over limit fees
Returned cheque, fees or payment processing fees (eg phone payment fee)
Cash advances and convenience cheques (often 3% of the amount)
Transactions in a foreign currency (as much as 3% of the amount). A few financial institutions do not charge a fee for this.
Membership fees (annual or monthly), sometimes a percentage of the credit limit.
Exchange rate loading fees (these may sometimes not be reported on the customer's statement, even when they are applied) Credit cards in ATMs : Credit cards in ATMs Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the card, but many card issuers charge interest on cash advances before they do so on purchases.
The interest on cash advances is commonly charged from the date the withdrawal is made, rather than the monthly billing date.
Many consumers have large cash balances, which have no grace period and incur interest at a rate that is (usually) higher than the purchase rate, and will carry those balance for years, even if they pay off their statement balance each month. These tips are important: : These tips are important: Sign your card -- as soon as you receive it! (Obviously, this is only as effective as the clerk who's checking it.)
When you use your card at an ATM, enter your PIN in such a way that no one can easily memorize your keystrokes.
Don't leave your receipt behind at the ATM.
Your PIN and account number from a discarded receipt could make you vulnerable to credit-card fraud. Also, don't throw out your credit-card statement, receipts or carbons without first shredding them! These tips are important: : These tips are important: Never give your credit-card number over the telephone unless you initiated the call.
Ignore any credit-card offer that requires you to spend money up-front or fails to disclose the identity of the card issuer.
Make certain you get your card back after you make a purchase
Always keep a list of your credit cards, credit-card numbers and toll-free numbers in case your card is stolen or lost.
Check your monthly statement to make certain all charges are your own, and immediately notify the card issuer of any errors or unauthorized charges. Types of cards in INDIA : Types of cards in INDIA Premium Credit Cards
Cash Back Credit Cards
Gold Credit Cards
Airline Credit Cards
Silver Credit Cards
Business Credit Cards
Balance Transfer Credit Cards
Co-branded Credit Cards
Low Interest Credit Cards
Lifetime Free Credit Cards
There are some additional credit cards that are available in India as well. Rewards credit cards available in India can be subdivided into six categories – Points, Hotels and Travels, Retail, Auto and Fuel. Thank you ! : Thank you !