How Does a Credit Card Work?

A credit card is a tool that an individual or an organization can use for managing their transactions. Credit cards have been proven an effective way to make one’s transactions efficient and convenient. But how does a credit card really work?

Credit Card

A credit card is an ID sized card that contains a chip and/or a magnetic strip which contains the personal information of the card holder. This personal information is the same information that one needs when making a loan. If an individual or an organization needs to make a purchase, presenting this card grants the purchaser the right to pay the merchant the corresponding price/fees involved for the product or service.

Merchant

A merchant is the entity from which the credit card holder purchases a product or service. By presenting the credit card with a merchant, the personal information is then transmitted to the credit card issuer who validates the credibility of the card holder to pay. Once clearance has been obtained by the merchant, the merchant receives a confirmation to proceed with the purchase. This gives the merchant the peace of mind that the product sold has been paid.

Credit Card Issuer

The credit card issuer is a bank entity or any financial institution who acts as a guarantor/payor to a merchant. The credit card issuer pays the merchant in advance for any purchase or payment made by the account holder. The credit card issuer then charges the account holder for the purchase. These charges remain as a debt being charged by the credit card issuer with interest. The credit card issuer is then in charge of collecting the sum purchased by the credit card holder.

Credit Card Holder

The credit card holder is the individual or organization who makes use of the credit card to pay it’s purchases and expenses. Once the payment has been made, the holder is then obliged to pay the entity issuing the credit card as they have paid the merchant for the purchase made.