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A user
is issued a credit card after an account has been
approved by the credit provider (often a general
bank,
but sometimes a captive bank created to issue a
particular brand of credit card, such as Wells
Fargo or
American Express
Centurion Bank), with which the user will be able
to make purchases from
merchants
accepting that credit card up to a pre-established
credit limit.
When a
purchase is made, the credit card user agrees to
pay the card issuer. The cardholder indicates
their 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
PIN.
Also, many merchants now accept verbal
authorizations via telephone and electronic
authorization using the Internet, known as a
customer not present
(CNP) transaction.
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 POS system with a communications link to the
merchant's
acquiring bank.
Data from the card is obtained using from a
magnetic stripe
or
chip
on the card; the later system is commonly known as
Chip and PIN,
but is more technically an
EMV
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.
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 (see
Fair Credit Billing Act
for details of the US regulations). 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 provider charges
interest
on the amount owed (typically at a much higher
rate than most other forms of debt). Some
financial institutions can arrange for automatic
payments to be deducted from the user's accounts.
Credit
card issuers usually waive 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 outstanding
balance and pays it in full, there would be no
interest charged. If, however, even $1.00 of the
total balance remained unpaid, interest would be
charged on the full $1,000 from the date of
purchase until the payment is received. The
precise manner in which interest is charged is
usually detailed in a cardholder agreement which
may be summarized on the back of the monthly
statement.
The
credit card may simply serve as a form of
revolving credit,
or it may become a complicated financial
instrument with multiple balance segments each at
a different interest rate, possibly with a single
umbrella credit limit, or with separate credit
limits applicable to the various balance segments.
Usually this compartmentalization is the result of
special incentive offers from the issuing bank,
either to encourage
balance transfers
from cards of other issuers, or to encourage more
spending on the part of the customer. In the event
that several interest rates apply to various
balance segments, payment allocation is generally
at the discretion of the issuing bank, and
payments will therefore usually be allocated
towards the lowest rate balances until paid in
full before any money is paid towards higher rate
balances.
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. As the rates and terms vary,
services have been set up allowing users to
calculate savings available by switching cards,
which can be considerable if there is a large
outstanding balance (see
external links
for some on-line services).
Because of intense competition in the credit card
industry, credit providers often offer incentives
such as
frequent flier
points,
gift certificates,
or
cash back
(typically up to 1 percent based on total
purchases) to try to attract customers to their
program.
Low
interest credit cards or even 0% interest credit
cards are available. The only downside to
consumers is that the period of low interest
credit cards is limited to a fixed term, usually
between 6 and 12 months after which a higher rate
is charged. However, services are available which
alert credit card holders when their low interest
period is due to expire. Most such services charge
a monthly or annual fee.
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