Credit Card


CREDIT CARD

A credit card is a payment card issued to users (cardholders) to enable the card-holder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for the amounts so paid plus the other agreed charges. The card issuer (usually a bank) creates a revolving account and grants a line of credit to the card-holder, from which the card-holder can borrow money for payment to a merchant or as a cash advance. In other words, credit cards combine payment services with extensions of credit.

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SIX THINGS YOU MUST KNOW BEFORE APPLYING for CREDIT CARD
  1. Your Income is an important parameter for Credit Card Eligibility
  2. Existing relationship with bank fastens the process
  3. Your past credit history matters  [Click here to generate your FREE CIBIL Score in 3 Steps]
  4. Be clear about the purpose of credit card
  5. FREE vs. Annual Fee credit card
  6. You can also get a credit card against a Fixed Deposit

TRANSACTION STEPS

Authorization: The cardholder presents the card as payment to the merchant 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.

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 to the cardholder's available credit (see authorization hold). Some transactions may be submitted in the batch without prior authorizations; these are either transactions falling under the merchant's floor limit or ones where the authorization was unsuccessful but the merchant still attempts to force the transaction through. (Such may be the case when the card-holder is not present but owes the merchant additional money, such as extending a hotel stay or car rental.)


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 totalling 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.


Chargebacks
: A chargeback is an event in which money in a merchant account is held due to a dispute relating to the transaction. Chargebacks are typically initiated by the card-holder. 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.


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. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case. Cards issued by banks to cardholders in a different country are known as offshore credit cards.


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.


Merchant account
: This could refer to the acquiring bank or the independent sales of the organization, but in general, is the organization that the merchant deals with.


Credit Card association
: An association of card-issuing banks such as Discover, Visa, MasterCard, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.


Transaction network
: The system that implements the mechanics of electronic transactions. It May be operated by an independent company, and one company may operate multiple networks.


Affinity partner
: Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers.


Insurance providers
: Insurers underwriting various insurance protections offered as credit card perks, for example, Car Rental Insurance, Purchase Security, Hotel Burglary Insurance, Travel Medical Protection etc.

The the flow of information and money between these parties — always through the card associations — is known as the interchange, and it consists of a few steps.

Pros

You don't have to carry a large amount of cash all the time Purchasing power increases because of the higher credit limit being offered to customers Almost all major establishments accept credit cards You can buy things online Credit cards also serve those who frequently travel internationally

Cons

Uncontrolled spending can result in a bad financial situation Credit cards are prone to security issues when spending online Credit cards impose high interest rates and other applicable fees. So if you do not make the payments as soon as possible, you might end up paying more than the price of the item or service you purchased.