How does a credit card work exactly? What is a credit card? These are all fair questions that a young person may have. Let’s start at the beginning.
Credit cards are a part of life for many people. Most people have at least one or two credit cards in their possession, and some may have as many as 10 credit cards. Experts believe that most consumers own two to three credit cards. Credit cards play an important role in consumer identification. For example, if consumers want to rent a vehicle from a rental company, they need to own a major credit card to do so. The great thing about credit cards is that consumers receive the convenience of making purchases today and having a month to pay the charges before finance changes accumulate.
Brief Credit Card History
Credit cards originated during the 1920s in the United States. Individual companies were the first to use credit cards. Companies—such as oil companies and hotels—issued credit cards to customers to use to make purchases at their businesses. The use of credit cards increased significantly over the years.
In 1950, Diners Club, Inc. introduced the first universal credit card. The card was usable at many businesses and stores. The new credit card system worked a little differently than earlier credit cards did. With the new credit cards, the credit card company charged annual fees to the cardholders. They also billed the cardholders on a monthly and sometimes yearly basis. The American Express credit card was established in 1958.
The bank credit card system came into use in the late 1950s. The way this system worked was a little different from the earlier credit card system. The bank payed the credit card charges to the merchant as the sales slips came in to the bank. This system helped the merchants to receive payments quickly and without any hassle. At the end of the billing period, the bank then organized all charges made by the cardholder. The cardholder had the option to pay the balance or the monthly minimum with or without interest.
BankAmericard was responsible for creating the first national bank plan. The plan started in 1959 on a statewide basis by the Bank of America. The system officially changed names in 1976 and became Visa. Other major banks followed this plan and began expanding their services, offering credit card use for lodging, restaurants, and more. Smaller banks saw the need to form relationships with international and national banks instead of only local and regional banks.
How Credit Cards Work
What is a credit card? A credit card is an extremely thin piece of plastic that has the cardholders’ identifying information such as a picture and signature. The card allows the person named on the card to make charges for services and purchases made to the account. The charges are billed on a monthly basis. The card is readable by store readers, Internet computers, ATMs, and banks.
Cardholders can receive credit cards from credit unions and banks upon approval by the credit issuer. Cardholders have the option to use the credit card at any merchant who accepts the credit card. The merchants generally have a display that shows the logo of the credit cards that they accept. Cardholders can ask the merchants which credit cards are accepted if the logos are not on display.
When cardholders make a purchase, they agree to pay that amount to the credit card company. Proof of the agreement takes place when cardholders sign a receipt with the details of the purchase, or the cardholder verifies the purchase by typing in a personal identification number (PIN). Card not present transactions (CNP) are acceptable these days by merchants taking transactions over the telephone and the Internet by using electronic authorization. The merchant requires the security code printed on the back of the credit card to verify that the actual cardholder is in possession of the credit card at the time of purchase.
The electronic verification system helps the merchant to determine if the cardholder has sufficient funds to cover the charge. The verification process takes only a few seconds. Information from the magnetic strip of the credit card determines if the card has sufficient funds during an in person transaction.
The cardholders receive a monthly statement for the purchases made on the cards. The fees may include finance charges, over-the-limit fees, late fees, and the outstanding balance. The cardholders have the right to dispute any charges that they feel are incorrect.
Credit cards are a great method to help establish or improve credit. Credit cards should be used responsibly in order to maintain creditworthiness. Cardholders must make sure that they understand how credit cards work before using them.