how does a credit card work?
I have always had a credit card but never got how the card transfers the info. can you help
- EricELv 41 decade agoFavorite Answer
Well, a credit card is an unsecured (usually) revolving loan account. In other words, they lend you money as you need it (revolving, as opposed to giving you $50k once and you paying it back at a fixed rate), and there is no collateral for that loan (unsecured). When you apply, they check your credit rating. If you have one and it is good enough, they open an account for you. They assign you a credit card number, imprint the card with the number, and send it off to you. You sign the back -- this is way the vendor is assured that you are the card's legitimate owner, and in fact is the only form of identification they are allowed to request.
You give the card to the vendor when you want to buy something, and typically they will swipe it electronically and enter the amount. It checks with the computers to make sure the card is legit and has enough free credit (your "credit limit" is the max they will let you carry (borrow) on the card, and your free credit is your credit limit minus your outstanding balance). If so, they reserve a portion of your credit (decrease your free credit) but don't add it to the balance yet. I forget what this is called, I think just an authorization. The vendor gets a confirmation number, then you sign in the slip. In some cases, e.g. fast food joints, the transactions are so small you are not required to sign. The vendor, theoretically, compares the signature on the slip to the one on the back of the card to see if they match. In practice less than 1% of the vendors you go to will do this. Since this is the only purpose for the signature, consequently, in most places, you can scribble whatever you want. (Just don't try this if they have possession of your card.) Another thing vendors are supposed to do but almost never do is take possession of the card until it is authorized, because they authorization could instruct them to confiscate the card.
So you go on your merry way. In a few days, the transaction "posts" and it gets added to your balance. At the end of the month you will get a statement showing your charges, credits, interest, and fees. If you pay your balance in full within the "grace period" (usually given as 20-25 days, though in fact it typically goes to the due date), you will not be charged a cent of interest. However, if you pay only a portion, or even if you make a payment that is not the full amount and then make another before the grace period that pays the full amount, they will start charging you interest, not only on what you've already charged, but also on what you charge in the future, until you pay off your whole balance, past, current, and unbilled.
BEWARE of special balance transfer or special rate (e.g. 0%) financing deals where they lend you large sums of money and say there is no interest. That's because they will apply your payment to the special balance first (they keep two balances, one for your special rate and one for your purchases and cash advances). The effect of this? You are charged full interest on your purchases. MORAL: If you get a 0% financing deal, stop charging to the card and charge on another, pay your balance (BOTH past AND unbilled) in full, and only then sign up for the special deal.
CASH ADVANCES -- almost always worth avoiding. Except for certain cards or special circumstances (sometimes if you ask, for examplle), regardless of what special deal they entice you with, you will get socked with a one-time 3% transaction fee to do a cash advance. This is only in the fine print. Remember, if you plan on financing the advance for a year, that's an extra 3% APR interest. And if you only plan on financing it for 6 months, that's effective 6% APR (on top of what you're paying). If you need a large sum of cash, and have good credit, there are always better ways to get it. If not, like I said, if you ask them to waive it, sometimes they will.
You generally have around 25 days or so to pay your bill. Don't treat your credit card like you do your phone or cable bill. Credit card companies are not only less tolerant of late payments, they will dump on heavy fees and interest. Typically if you are just a week late or something they might only charge you interest, but don't get in the habit of paying late. Also, late payments -- like those over 30 days -- are reported to your credit report, where other companies will see, and thus be more reluctant to lend to you.
Chargebacks -- You are allowed to dispute a charge that appears on your bill, if you do so in writing within 60 days. You have to do this as a last resort after attempting to work things out with the vendor. This is heavily in your favor; if they investigate and accept it, the vendor eats the charge and you get a refund. Obviously use this judiciously or someone will get suspicious. The vendor, by the way, may get penalized for this. However be careful. Often vendors (especially Internet vendors) will charge through a third party. Consequently you may have gone to "Joe's Emporium" webpage, but the charge may show up as "Innovative Products". This is obviously a bad design and I don't weep any tears over chargebacks in such a situation, but just be aware when you are placing an order for messages about how the charge will appear (often, but not always, they will warn you), and look at the amount and date of strange charges to see if they ring a bell. Where this happened to me was Logan Airport's Wi-Fi network. Obviously I am thinking "Logan" when I go through it, but they contracted it out to a company, and when it showed up, I did not recognize it. If I had paid closer attention when logging in, maybe I would have seen a mention of the company, but I didn't, so I initiated two chargebacks, which were accepted. Eventually I figured out the error and now I feel guilty. :-(
Managing your credit -- it is best to have two or three active credit cards. More or fewer than that and it could adversely affect your credit. Do not cancel your first credit card, or at least, keep at least one credit card from your very first years with a credit record. That's because the length of your credit record is reckoned from the beginning of the first active account -- if, for example, you have one MasterCard for seven years, then apply for a Discover card and cancel your MasterCard, in seven more years your MasterCard account will go off the record, and all they will see is the seven years of your Discover card, not the full fourteen years. (Note: It's OK if you switch cards within the same bank, or upgrade your card, just don't leave the bank entirely.)
Credit requests -- too many requests for credit are bad for your credit. Don't apply for a bunch of credit cards at once, do it maybe one every two months or so, or longer, if possible. They think you may be trying to build up a lot of credit so you can use it all at once and default on it. But, asking for a credit line increase every year is healthy. Sometimes companies will increase your credit line spontaneously; sometimes they have a set amount they will instantly give you should you ask; sometimes they will have to run a credit report before granting your request.
Your credit line -- under no circumstances come even close to hitting your credit limit. Approaching it is bad; exceeding it much worse. Don't even use more than half of it if you can avoid it. The smaller percentage of it you use, the better for your credit.
Paying off balances -- it is good to pay off your balance each month. In general, however, you will not build a credit line if you never actually borrow enough money to incur interest. Carrying a balance (this is whata is meant when you don't pay off your balance one month and it carries forward to the next month) is good to do every once in a while. If you are borrowing money some other way (mortgage, car loan, installment loan, etc.) that will probably suffice.
Advice -- Use your credit card like cash. If you can't pay for it and don't have a truly urgent need for it, don't buy it. If it's something you need to have to generate income, that is, if it is an investment that will pay a return down the line, then that's a good use of it. Don't use it to redecorate your house or take a trip to the Carribean with no savings. If you must use it to borrow money to pay for items you want but don't need, at least wait until you have a few years' experience with credit before you start splurging.
- 1 decade ago
That metal stripe on the back of the card has the digital information about you account. When the clerk or you swipe the card the card reader sends that info with the purchase info to the credit card company. New credit cards us a rfid chip so you don't have tow swipe it.
- 1 decade ago
Let's start at the beginning. A credit card is a thin plastic card, usually 3-1/8 inches by 2-1/8 inches in size, that contains identification information such as a signature or picture, and authorizes the person named on it to charge purchases or services to his account -- charges for which he will be billed periodically. Today, the information on the card is read by automated teller machines (ATMs), store readers, and bank and Internet computers.Source(s): No credit, Bad Credit, NO PROBLEM!~http://badcreditresources.com/bad-credit-credit-ca... How To Start A home based business ~ http://www.homebasedbusinessbooks.com/
- bachinskiLv 44 years ago
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