Dear Eze4Real,
First, credit cards are issued by a company that has access to your
bank account, and to withdraw money from there. In exchange, you get a
"loan" to pay for something you purchased, so you could later pay it
in return to the company that gave that loan.
A summarised version of the explanation bellow is:
1. You pay with your credit card, which has some identifying details
on it (magstripe and numbers; now smart cards as well); the
information on the card is readable by machines.
2. It is being checked
3. If approved, the payment goes through, and you in fact commit into
paying the sum to the creditor. Here, the Annual Percentage Rate
(APR), or interest rate (the amount you have to pay in addition, for
using the card); and a Minimum monthly payment rate (again, a sum you
have to pay each month when using the card) are important in
determining the return rate.
Here is an explanation on the begginning of the usage of credit cards:
"Credit cards have been around since the 1950's. Businesses began
offering their customers cards so that they could pay for all their
purchases with one single bill at the end of the month. Many shops
still offer these "store cards".
[...]
As the use of cards grew in popularity, groups of businesses got
together to introduce general purpose credit cards. The "Diner's Club"
card was one of the first, allowing you to purchase meals in
restaurants around the the world."
(SOURCE: More Than You Think, Credit Cards,
<http://www.morethanyouthink.com/shopping/creditcards.html>).
The site also explains about the technical workings of the credit card:
"When you use a credit card, the following details get checked:
Shop Identification Number
Valid card number
Expiry date
Credit-card limit
Amount
Credit card transactions are usually handled through an intermediary,
called an "acquirer". When you pay for something using your card, the
shop sends a request to the acquirer. The acquirer checks your details
against the bank's database and then provides a guarantee to the shop
that they will be paid. This process is usually automatic, and
completely finished before you get your receipt.
It is also possible to make these checks over the phone (which a few
shops still do) or over the Internet (which a growing number of shops
do)."
(SOURCE: ibid, How Credit Cards Work,
<http://www.morethanyouthink.com/shopping/howcreditcardswork.html>).
The site HowStuffWorks distinguishes between the different types of
credit cards: "There are basically three types of credit cards:
Bank cards, issued by banks (for example, Visa, MasterCard and Discover Card)
Travel and entertainment (T&E) cards, such as American Express and Diners Club
House cards that are good only in one chain of stores (Sears is the
biggest one of these, followed by the oil companies, phone companies
and local department stores.) T&E cards and national house cards have
the same terms and conditions wherever you apply." (SOURCE:
HowStuffWorks, "How Credit Cards Work"
<http://money.howstuffworks.com/credit-card12.htm>).
The Oklahoma BAR Association has an important legal note to that:
"The law requires that the lender tell you how much the card will cost
you. The finance charges and other credit costs must be included in
the annual percentage rate (APR) of interest, and the lender must give
you this information. Different cards have different interest rates.
There are two types of interest: simple and compound. With simple
interest, you pay a set amount for a certain period of time. With
compound interest, the interest is added back into the principal, and
you pay interest on the new amount. With compound interest, you pay
interest on the interest. Check to get the best rate possible."
(SOURCE: Oklahoma BAR Association, "Legal Rights for Young Adults in
Oklahoma", <http://www.okbar.org/news/guide.htm>).
HowStuffWorks also has further technical explanations. First, to the
numbers on the card, which determine what and whose card is it:
"Although phone companies, gas companies and department stores have
their own numbering systems, ANSI Standard X4.13-1983 is the system
used by most national credit-card systems.
[(...) - here you get a good illustration on the site, which I
recommend that you'll have a look at]
Here are what some of the numbers stand for:
The first digit in your credit-card number signifies the system:
3 - travel/entertainment cards (such as American Express and Diners Club)
4 - Visa
5 - MasterCard
6 - Discover Card
The structure of the card number varies by system. For example,
American Express card numbers start with 37; Carte Blanche and Diners
Club with 38.
American Express - Digits three and four are type and currency, digits
five through 11 are the account number, digits 12 through 14 are the
card number within the account and digit 15 is a check digit.
Visa - Digits two through six are the bank number, digits seven
through 12 or seven through 15 are the account number and digit 13 or
16 is a check digit.
MasterCard - Digits two and three, two through four, two through five
or two through six are the bank number (depending on whether digit two
is a 1, 2, 3 or other). The digits after the bank number up through
digit 15 are the account number, and digit 16 is a check digit."
(SOURCE: HowStuffWorks, "How Credit Cards Work",
<http://money.howstuffworks.com/credit-card3.htm>).
HowStuffWorks also explains more about how the magnetic stripe, on the
back of the card, works:
"The stripe on the back of a credit card is a magnetic stripe, often
called a magstripe. The magstripe is made up of tiny iron-based
magnetic particles in a plastic-like film. Each particle is really a
tiny bar magnet about 20-millionths of an inch long.
[...]
The magstripe can be "written" because the tiny bar magnets can be
magnetized in either a north or south pole direction. The magstripe on
the back of the card is very similar to a piece of cassette tape
[...].
A magstripe reader (you may have seen one hooked to someone's PC at a
bazaar or fair) can understand the information on the three-track
stripe. If the ATM isn't accepting your card, your problem is probably
either:
A dirty or scratched magstripe
An erased magstripe (The most common causes for erased magstripes are
exposure to magnets, like the small ones used to hold notes and
pictures on the refrigerator, and exposure to a store's electronic
article surveillance (EAS) tag demagnetizer.)
Information on the Stripe
There are three tracks on the magstripe. Each track is about one-tenth
of an inch wide. The ISO/IEC standard 7811, which is used by banks,
specifies:
Track one is 210 bits per inch (bpi), and holds 79 6-bit plus parity
bit read-only characters.
Track two is 75 bpi, and holds 40 4-bit plus parity bit characters.
Track three is 210 bpi, and holds 107 4-bit plus parity bit characters.
Your credit card typically uses only tracks one and two. Track three
is a read/write track (which includes an encrypted PIN, country code,
currency units and amount authorized), but its usage is not
standardized among banks.
The information on track one is contained in two formats: A, which is
reserved for proprietary use of the card issuer, and B, which includes
the following:
Start sentinel - one character
Format code="B" - one character (alpha only)
Primary account number - up to 19 characters
Separator - one character
Country code - three characters
Name - two to 26 characters
Separator - one character
Expiration date or separator - four characters or one character
Discretionary data - enough characters to fill out maximum record
length (79 characters total)
End sentinel - one character
Longitudinal redundancy check (LRC) - one character
LRC is a form of computed check character.
The format for track two, developed by the banking industry, is as follows:
Start sentinel - one character
Primary account number - up to 19 characters
Separator - one character
Country code - three characters
Expiration date or separator - four characters or one character
Discretionary data - enough characters to fill out maximum record
length (40 characters total)
LRC - one character"
(SOURCE: HowStuffWorks, "How Credit Cards Work",
<http://money.howstuffworks.com/credit-card3.htm>).
Now, HowStuffWorks refers to the authentication of the card, that is,
the ability to determine whether or not the cards is legit and can pay
the credit. I already refered to those issue - whether it is through
the Internet, a voice recognition system or a computerised one. You
can read the details here:
HowStuffWorks, "How Credit Cards Work",
<http://money.howstuffworks.com/credit-card4.htm>).
If you're interested in more technical information, my colleague
Answerguru has also answered a similar question, referring to the
relevant ISOs:
"For more technical details relating the ISO 7810, 7811, and 7813
Standards (those which govern card format/dimensions, stripe layout,
magnetic stripe data and character sets) the following link provides
all the specifics:
http://www.cyberd.co.uk/support/technotes/isocards.htm
Here is a great glossary of terms relating to Magnetic Stripes:
http://www.aimglobal.org/technologies/card/msglossary.htm
There is also an interesting discussion regarding coercivity of
magnetic stripes (related to the encoding process):
http://www.eltroncards.com/about/aboutcard5.htm
If you are interested in first-hand ISO documentation, they are
available for purchase on a per-standard basis:
ISO/IEC 7810:1995 - "Identification Cards -- Physical Characteristics"
http://www.iso.ch/iso/en/CatalogueDetailPage.CatalogueDetail?CSNUMBER=14715&ICS1=35&ICS2=240&ICS3=15
ISO/IEC 7811-1:2002 Identification cards -- Recording technique --
Part 1: Embossing (available in English only)
http://www.iso.ch/iso/en/CatalogueDetailPage.CatalogueDetail?CSNUMBER=31433&ICS1=35&ICS2=240&ICS3=15
ISO/IEC 7811-2:2001 Identification cards -- Recording technique --
Part 2: Magnetic stripe -- Low coercivity (available in English only)
http://www.iso.ch/iso/en/CatalogueDetailPage.CatalogueDetail?CSNUMBER=31440&ICS1=35&ICS2=240&ICS3=15
ISO/IEC 7811-6:2001 Identification cards -- Recording technique --
Part 6: Magnetic stripe -- High coercivity (available in English only)
http://www.iso.ch/iso/en/CatalogueDetailPage.CatalogueDetail?CSNUMBER=33228&ICS1=35&ICS2=240&ICS3=15
ISO/IEC 7813:2001 Identification cards -- Financial transaction
cards (available in English only)
http://www.iso.ch/iso/en/CatalogueDetailPage.CatalogueDetail?CSNUMBER=31441&ICS1=35&ICS2=240&ICS3=15"
In general, Answerguru's answer is a good complimentary to this one,
with explanations on how ATMs work; and on the "best" stripe reader.
How do credit cards work?
<http://answers.google.com/answers/threadview?id=241775>
HowStuffWorks also explains, that in order to maintain security and
increase it, there is an increased usage of "smart cards", that are
incripted all over (SOURCE and more information on smart cards: "How
Credit Cards Work", <http://money.howstuffworks.com/credit-card5.htm>);
it explains what security measures the customer should take, Online
<http://money.howstuffworks.com/credit-card6.htm> and Off-Line
<http://money.howstuffworks.com/credit-card7.htm>); How to get
yourself a Credit Card
<http://money.howstuffworks.com/credit-card9.htm>, to understand what
kind of credits you receive
<http://money.howstuffworks.com/credit-card10.htm>, what to beware of
<http://money.howstuffworks.com/credit-card11.htm>; How to choose the
best one for you <http://money.howstuffworks.com/credit-card13.htm>;
and much more - it is worth to look at their site).
The Oklahoma BAR Association has also some important advices for
thsose who dispute their bill: "WHAT IF YOU DISCOVER AN ERROR IN YOUR
BILL?
To avoid problems with your credit bill, it is a good idea to save all
of your receipts and go over each monthly statement carefully. Federal
laws give you certain protection when there is a problem with your
bill if you meet these guidelines:
DO NOT simply ignore a mistake and refuse to pay.
You must give a written notice to the creditor within 60 days of
getting the statement.
You must set out in this notice the reason(s) you believe there is a
billing error and the amount of the error.
In turn, the creditors are required to:
Respond to your written complaint within 90 days;
Not report the matter to a credit bureau until the problem is resolved.
Not require payment of the disputed amount until the creditor has
looked into the matter." (SOURCE: Oklahoma BAR Association, op cit,
<http://www.okbar.org/news/guide.htm>).
The Australian Credit Union has more information for those wishing to
have a clean credit and to manage their credit card right:
Play Your Credits Right
<http://www.cu.net.au/presentation/library/download/Play_your_cards_right.pdf> :
Here is more information for learners:
=====================================
Maryland Public Television, The Scoop on Credit
<http://senseanddollars.thinkport.org/spending/credit_scoop.html>
explaining in simple terms how credit cards work
How do Credit Cards work?
<http://www.umsl.edu/~wpockets/treehouse/credit/credit1/credit1.html>
A lesson plan at UMS
Filling Empty Pockets: Borrowing, Loans, and Credit
<http://www.thirteen.org/edonline/lessons/financial_lit/b.html>
Another lesson plan on credit cards
I hope this answered your question. Please contact me if you need any
clarification on this answer before you rate it. My search terms:
"how do credit cards work?"
"how credit cards work?" |
