How Do Credit Cards Really Work

How Do Credit Cards Really WorkEach of us as children always had some sort of curiosity as to how things worked. Some of us have been caught by our parents after taking apart our favorite toy just to get a glimpse inside of it to see what makes it work. As adults we still carry that curiosity especially as advancements in technology continue to provide new ways to streamline things and allow for better more efficient gadgets. If you ever had a curiosity about how credit cards work, reading on will help you satisfy your curiosity and give you a better understanding of the entire process.

If you have ever owned or seen a credit card, the first thing you notice is the black stripe on the back of the card. This black stripe which is better known as a magnetic strip contains all of the necessary information regarding the cardholder’s account. The information contained in the magnetic strip includes things such as the account number, name and address of the card holder, card issuer information, among other things. Damage to this strip prevents the necessary information it provides to be unattainable and in many cases has to be replaced.

When you go to make a purchase using your credit card, you are often required to swipe your card through an electronic device called credit card readers or point of sale machines. These machines read the information provided by the magnetic strip on the credit card and sends the information typically via telephone to an awaiting computer on the other end. The computer analyzes the information first to validate the card and that the cardholder has an active account. If it fails this check, the card is denied and a message is sent back to the originating machine.

If it passes this check and the computer determines that it is a valid credit card with an active account, it then analyzes the purchase information. The computer takes the amount that is going to be charged to the credit card and checks it against the funds availability of the cardholder’s account. If there is sufficient availability of funds associated with the account, the payment is processed and an approval message is sent back to the originating device and the purchase is then complete. An insufficient amount of funds available will result in a denied message to be sent back to the originating device.

A typical transaction can take as little as a minute for the information to be sent and received between the computer and the point of sale machine. Once a transaction is approved, the receiving computer then sends the necessary information to the card issuing company who then processes that information to create the monthly bill that you typically receive. Online payments work in very much the same way except that the information is sent via the Internet rather than a telephone connection. The speed of an online credit card transaction is just as fast as it is from a point of sale machine.