A credit card is a revolving credit account that allows you to borrow funds from the card issuer for cash withdrawals, purchases, or bill payments. When using a credit card, you establish a credit line that must be repaid with added interest. Factors such as your income level and credit score typically influence the spending limit assigned to your credit card.
Credit cards offer the advantage of helping you build a credit history; however, late payments or excessive spending can affect your credit score. These cards provide benefits in the form of rewards, charge interest on unpaid balances after the due date, and may involve annual fees.
How exactly do credit cards work?
Mechanisms of Credit Card Transactions
Unlike debit cards, which are directly linked to your banking account, credit cards allow you to make purchases within the predetermined limit the card issuer sets.
The Authorization Process
Let’s imagine you want to deposit money into your online gambling account for some weekend entertainment. You log into your online casino and proceed to the deposit section. There, you will select your credit card as the payment method. After confirming the transaction, the online casino’s (the merchant) POS system transmits the transaction to their bank. Their bank will use your credit card’s network, like Visa or Mastercard, to request authorization from the card issuing bank. Once the transaction is authorized and approved, the online casino credits your account with them. The authorization process is similar across many platforms, including shopping online and purchasing goods and services in person.
Using a credit card is among the safest options for online gambling or purchases from e-commerce sites. Throughout the authorization process, security measures are implemented by both the online casino, in this case, and the card network to ensure the safety of your transaction details and financial information. Techopedia’s Sergio Zammit notes that credit card companies are leading the way in security development within the financial sector. He adds that they are well-known for providing a highly secure system that provides support in the event of fraud or scams.
The Role of Credit Card Networks
Credit card networks like Discover, American Express, and Visa, facilitate the communication and movement between the issuing and acquiring banks. They are responsible for managing the systems, authorization protocols, clearing, and finalizing credit card transactions. These networks also set the interchange fees that apply to each transaction.
Credit Limits and Available Credit
Every credit card comes with a predetermined credit limit. The issuing bank determines this limit based on your creditworthiness, your monthly income, and other relevant factors. The available credit is the remaining amount between the credit limit and the outstanding balance on the card. The issuing bank verifies the available credit during the authorization process to ensure cardholders do not exceed the predetermined limit.
Annual Percentage Rate and Credit Card Fees
The Annual Percentage Rate (APR) is a way to determine the overall cost of borrowing money on a credit card, including the interest rate and any additional fees. Credit cards have variable APRs that change by a benchmark like the prime rate. APRs are calculated annually but are charged to your credit card on a monthly basis.
What Is the Difference Between a Fixed APR and a Variable APR on a Credit Card?
The main difference between fixed and variable APRs on a credit card is in how interest rates are determined and whether they change over time. A fixed APR remains constant throughout the term of the credit card. This means that interest rates are not affected by market fluctuations like the prime rate or inflation. While fixed APRs provide stability and predictability in monthly payments, they will be higher than a variable rate. Despite its fixed nature, missed payments or changes in your credit score can affect the rate.
Variable APRs are common in credit cards and can fluctuate depending on marketing conditions. Variable APRs are tied to an index, like the prime rate. If that specific index changes, so does the APR. Credit card issuers may add their margin percentages on top of the index to determine the variable APR. Understanding the difference between fixed and variable APRs is crucial since it determines the cost of borrowing funds and can affect the overall expenses of using your credit cards.
Type of Credit Card Fees
Credit cards have different fee structures:
- Annual fees: Annual fees are charged by the card issuer once a year. These fees are usually charged to cover the costs of benefits and rewards or to compensate for high-risk lending.
- Late payment fees: Late fees are typically charged when the minimum payment is not paid by the due date.
- Over-the-Limit fees: These fees are charged should you exceed the predetermined limit set by the card issuer.
- Other fees: This could include foreign transaction fees, cash advance fees, or balance transfer fees.
Minimum Payments
The minimum payment on your credit card is the lowest amount you can pay each month without incurring penalties or late fees. The minimum payment you would need to pay monthly is calculated as a percentage of the outstanding balance. This percentage can vary depending on the credit card issuer and your credit history. The minimum payment is designed to ensure that you can keep up with the payments on your account and keep the account in good standing.
Common Credit Card Security Features
Credit card cyber threats like credit card fraud and identity theft are a significant and growing problem globally. Credit companies mitigate these threats through security by implementing various robust measures to protect cardholders. Some key technologies and strategies used by credit card companies are:
- EMV chip technology: This security feature offers increased security for face-to-face transactions by generating unique transaction codes. This makes it challenging for threat actors to clone your credit card for fraudulent transactions.
- Two-factor authentication (2FA): 2FA technology requires additional verification steps beyond your personal card details. This additional layer of security will help you protect your accounts from unauthorized access and improve the security of your online transactions. For instance, you can set up two-factor authentication when using your credit card to pay bills online, wager at an online casino, or top-up investment accounts.
- Address Verification Service (AVS): AVS is a security measure that verifies that the billing address given during a transaction matches the address the card issuer has on file. This reduces the risk of fraudulent transactions and identity theft.
- Encryption and Tokenization: Credit card companies will encrypt sensitive cardholder information by replacing card numbers with unique tokens (tokenization). This security measure ensures that your sensitive information is secure and protected.
- PCI DSS Compliance: Compliance with Payment Card Industry Data Security Standards (PCI DSS) is essential for credit card companies to maintain secure processing environments and comply with industry best practices to ensure data protection.
Conclusion
Understanding how a credit card works, including the fee structure, APRs, and its security features can help you minimize the risk of overspending, and maximize financial stability. Before signing up for a credit card, consider the rewards, benefits, and interest rates, and how they can impact your credit score. Selecting the best credit card for your needs can help you build your credit history and be a valuable financial tool.