How does a credit card work?

You are issued a credit card with a limit amount. You can make any kind of purchase with your credit card be it online or international payments. Whenever you swipe your credit card at the billing counter the bank is informed about the transaction. The bank pays for the money at that point of time and reimburses the money to the merchant. The same amount will be reflected in your monthly bill and you will have to pay only the amount that you purchased without having to pay any kind of interest for the free grace period.

Simple ways of understanding credit cards

• Every credit card company has its own specific set of policies. Make sure you have read and understood all terms in regards to interest charges, balance transfer and advance cash options. You can always consult with the bank representative in case you have any query.
• There are also two types of credit cards that you can choose from. They are secures and unsecured credit cards. In case you want a secured credit card than you will have to deposit an amount of money with the bank as security hence the name. This option is best suited if you do not use your credit card often and only use for purposes like booking a hotel or plane ticket.
• Unsecured credit card is the most popular form of credit card. Your credit history will play a major role in deciding whether the bank issues you with an unsecured credit card. You need to have a good credit history and debt management history to take advantage of this type of credit card.

Credit cards are indeed very useful and helpful tool!

However, you need to learn how to manage your credit bills for that blissful financial life. You need to weigh your paying limits, and therefore choose card that let’s you breathe easy. Spending the plastic money will take only a few minutes but paying it back takes a toll on your peace of mind and finances. Missing out on a single payback due date will increase your APR four folds, therefore get realistic and stay clear of credit cards that are expensive or have an annual charge attached with them. Go through the terms and conditions well before settling on the plastic money.

A regular monthly expense report

This is an excellent feature that you must make use of. The monthly expense report offers two benefits. Firstly, you will be able to check if there are any fraudulent charges in your report, which must be avoided. Secondly, it will also help you draw a comparison between your income and the expenses. That will allow you to see whether you are spending unnecessarily anywhere. Thus, it will help you manage your finances and improve your credit history to a great extent.

Reward points for expenses

There are credit cards that offer a stipulated number of reward points for all your expenses. The best offers are those where you don’t have any caps as to how many points you can redeem, when you can redeem and where you could redeem your points. Thus, it is an interesting way of making all your expenses count to something for you. Some credit cards which have brand tie-ups give the additional benefit of restaurant discounts and access to special lounges across the world, which is especially useful for those who travel a lot and around the world.

Security features

Good credit card companies offer some excellent security features, which will ensure that there is no fraudulent usage of your card in any way. There are cards which will even alert you by sending messages when your card has been charged for big expenses or when it has been charged at merchant stores quite a distance away from your usual location. Intuitive features like this make sure that no one gets hold of your card and starts using it as they like.

Insurance coverage

There are some credit cards that come with some additional coverage for the card holder. For example, some cards offer travel insurance while some offer lost baggage reimbursement. This additional feature is a nice add-on to have on your card especially when you travel frequently.

Quick service

There are several features offered by good credit cards that fall under this category. There are cards which offer an add-on roadside assistance, round the clock, so that you can call a hotline number when you are in some sort of trouble. Similarly, credit card holders get a hotline number where they can call and report card theft, so that it is locked immediately before someone else makes undue use of your credit card. It is also interesting to note that some credit card companies will actually give you cash advance so that you don’t have trouble with your expenses while you are waiting for your lost or stolen card to be replaced. All these features ensure that you have a fantastic experience as far as making use of the card is concerned.

Wrong! It’s dangerous to think of credit cards in that way, or as “free money,” because that attitude makes it oh-so-easy to overspend and get into debt. Experts have known for a long time that consumers spend differently when they use credit cards as opposed to cash.

“When consumers are exposed to new products and thinking about paying with credit, they tend to focus on the good things about the product — the aesthetics of it, the features that are better than other products they’re considering, the sexiness and luxury of it. That’s as opposed to details related to cost, like the price, shipping cost, warranty cost, installation cost and effort, ” said Randall Rose, author of a study entitled “Do Payment Mechanisms Change the Way Consumers Perceive Products?” that has appeared in the Journal of Consumer Research.

By gaining a better understanding the basics of what happens during a credit card transaction, you give yourself the opportunity to be much more mindful when paying for things using plastic.

Authorizing a Purchase

When a merchant swipes your card (or when you tap or wave it) at a register, or any credit card reader,card’s information and atransaction amount is forwarded to the merchant’s bank that will process this transaction and fund the merchant on your behalf – called. Merchant’s bank in this transaction is known as an Acquirer (or acquiring bank).

At the Authorization phase, the transaction detailsare passed along to your credit card issuer, the company that issued you the card. If your issuer determines that you have enough credit available to cover the purchase amount, they will transmit an approval to the acquirer, who then passes an approval code onto the store. At that point you are presented with an authorizationreceipt; you sign, gather up your new belongings and go on your way.

If things are running smoothly, this entire process should only take a few seconds.Despite the fact that you have received an authorization receipt and been allowed to leave with your item, the store has not yet received any money for it. Most store credit card readers store the information after authorizing it, and thensubmit all transaction details, again, to the Acquirer, but this time with a request for payment. This storage of credit card sales is known as batching. In general, most stores collect all daily transactions in a batch, which they present for payment to the Acquirer at day’s end. The Acquirer needs a couple of days to initiate a process known as “Clearing”.

Getting Paid

“Clearing” is a financial process during which the Merchant’s Acquiring bank sends the transaction information to the card network that supports your card,such as Visa, MasterCard, Discover and American Express.

The card network sends the purchase data to your credit card issuer, a financial institution such as Bank of America, Chase or Citibank. The issuer deducts an interchange fee, typically 3% of purchase amount, a part of which is shared with whichever credit card network that processed the transaction.

Although at time of authorization a hold at or above your purchase amount was placed on your card, this is the moment your issuer will actually deduct the money and credit network who willin-turn wire the money to the Acquirer which deducts a discount fee, and deposits remaining balance of funds to the Merchant’s account with the Acquirer.

Now all that remains is for you to pay the credit card issuer back, and, preferably, do it in full, before the monthly billing cycle ends.

If you were to find yourself in an especially nasty situation where your spouse,for whatever reason, maxed out a joint credit card account you share, and unbeknownst to you, there are a few things you must know:

The community property states

If you happen to reside in one of the nine “community property states” in the United States, such as Texas, Nevada, Arizona, Louisiana, Idaho, New Mexico, Wisconsin, Washington or California,any credit card debt your spouse amassed throughout the duration of your union,would very likely end up under joint responsibility, regardless whether the debt was charged on a joint credit card account, or not. This holds true, until you legally separate, after which the debt officiallybecomesresponsibility of anex-spouse identified by court documents as the originator of purchase. Be wary, however, that a court decree awarding you an escape ticket from debt, does not automatically remove your responsibility in the eyes of the bank. You must follow through with notifying the bank of court’s decision.

But if you do not live in one of those states, the afore-mentioned scenario – wherein your spouse transfers debt onto your joint credit card account – has much graver consequences for you, and you need to take some steps to protect yourself from further financial ambush.

Shut It Down

While you cannot simply remove your name from a joint account, or excuse yourself from responsibility to pay a debt, regardless of how the debt wound up on your card, you can, as a joint accountholder, close down the account entirely, to prevent further charges. While this does not fix the problem of existing debt balance, it will prevent your spouse from being able to rack up any more new charges on the card.

Focus On Your Own Finances

You can never control the actions of another person but you can control what you do and how you react. Now is the time to sit down and put your own financial house in order. Plan a budget, and in that budget include monthly payments of your portion of the joint credit card debt. Make regular, on-time payments each month, and be sure to keep all of your records. That way, if you ever have to, you can prove in court that you have been upholding your end of your joint financial responsibilities. Getting your finances under control will go a long way towards making a tumultuous and unsettling time a little bit easier to bear.

Plan How to Repay

Establish a repayment plan in order to pay down the amount that is owed. Ideally, you should meet with your spouse to calmly discuss finances and repayment of the joint credit card debt. If things are at a point where an amicable conversation of this sort is not feasible, you may have to consult with your attorney about how best to proceed. It may require the help of a mediator to reach a decision.

Yes, actually it can hurt – your credit score. Here’s how:

1)    Whenever you apply to open up a new line of credit, the credit card company or retail store pulls your credit report to have a look at your credit history in order to determine whether or not you represent a good credit risk. Too many of these inquiries can have an adverse effect upon your FICO score, causing it to drop anywhere between 15 to 30 points. Opening too many accounts in a short amount of time is regarded by credit scoring bureaus as behavior that is exhibited by riskier borrowers, believing those consumers represent a higher risk for falling behind on paying off their debts. Even if you close the retail store card after shortly after paying off your balance, it won’t undo any of the damage to your score that was inflicted by applying for the card in the first place.

2)    A retail credit card is typically only good for use at the store you got it from, meaning that you will need to have at least one other multi-purpose card that you can use when you want to charge purchases anywhere other than that one particular establishment. Not only does having a lot of balances spread over several different cards increase the possibility for you to slip up and make a payment late, but it can also upset your credit utilization ratio if one of the cards has an especially low spending limit. The vast majority of retail credit cards have notoriously low credit limits, which means that it does not take a very big balance to give you a high credit utilization ratio. That ratio is something credit scoring agencies factor in when determining your credit score and, in that case, lower is better. FICO examines the combined utilization ratio for all credit card account you have, in addition to the ratio on each individual account

As if all that is not reason enough to steer clear of retail store credit cards, the APR on such cards is often much higher than the national average on general purpose cards. The rewards programs affiliated with retail store cards are limited at best – they don’t offer perks such as cash back or airline miles.

Finally, numerous studies have proven that shoppers spend differently when charging purchases to a credit card as opposed to using a debit card where the amount is instantly deducted from their checking account. Quite a bit more, in fact. A study done by Javelin Strategy & Research shows that, on average, consumers spend $58.29 per transaction when using a debit card in contrast to an average purchase amount of $82.10 with a credit card.

It is always wise to think before you spend, but be absolutely certain that you think TWICE before applying for a store credit card.

Your Employment Status

If you get laid off from a job that does not mean your credit score will dip. While it is not uncommon for people who lose their job to suffer a lowering of their credit score this is due to their falling behind on payments as a result of the loss of income, not because of the job loss itself. So even if you have to squeak by on unemployment benefits for a while as long as you can pay your bills on time your credit score will be fine.

Your Salary

Because you just learned that your employment status has no bearing upon your score, it should not come as a huge surprise that how much you earn has no effect upon your score, either.

Your Savings

Having a big bank account balance will not make you seem more appealing to lenders because they do not factor in how much you have saved when evaluating your credit worthiness. In a roundabout way, though, your savings can impact your score because if you have an emergency fund in place you can use it to help you not fall behind on your bills should you ever encounter financial hard times. Also, if you are in debt using some money from your savings to pay it down will ultimately lead to a positive impact upon your score.

If You Pay Down Your Credit Cards Within The Issuer’s Billing Cycle

A huge portion of your credit score – 30% – is determined by your credit utilization ratio or, in other words, how much debt you have compared to your amount of available credit. In this case, the lower, the better. A credit score is essentially a snapshot of your credit situation at the exact time a lender decides to check it. So if you previously believed that revolving a balance from month to month was advantageous to your credit score realize that the only thing it does is cost you money in terms of interest. Also, if you max out your card during the month it is bad for your credit utilization ratio – even if you pay it off again before the billing cycle ends.

The Value Of Your Home

Should the value of your home drop suddenly, you needn’t worry that your credit score will drop too. The FICO scoring formula does not include your home’s current market value.

But you should know that credit card companies aren’t above dressing up certain services they are legally obliged to provide to cardholders in the hopes of presenting them to prospective new account applicants in the guise of a perk. Keep an eye out for the following things that your lender may want you to believe are magnanimous offers on their part, but are in reality your federally-mandates rights.

No Co-Signer Needed

This is something you will encounter over and over again in the college credit card arena. Credit card companies would like first time applicants to think the issuer is doing them a big favor by not requiring them to have a parent or other adult co-sign the account for them in order to guarantee the debt and allowing them the opportunity to qualify for a card all on their own. However, thanks to the Credit CARD Act, the eligibility of any applicant to carry a credit card – student or otherwise – will be determined by their own individual income. If a student can prove they have sufficient personal income to cover charges made to the card, then they can apply on their own. Likewise, the credit limit on the account will be determined by the applicant’s income. So anyone is able to apply to open up their own credit card account without a co-signer, but only those with an income will be approved.

No Consumer Liability for Any Unauthorized Purchases

If a credit card company makes the promise that they will cover any unauthorized charges made to your account in the case of fraud, you should realize that your liability is already very limited regardless. Because of something called the Truth in Lending Act that was put into place in 1968, a cardholder’s liability for any unauthorized purchases charged to their account is $50 and they cannot be held responsible for any charges that occur after the card has been reported as lost or stolen. So if a credit card company is trying to woo you with zero liability for any unauthorized purchases, while nice, it’s not really that big of a perk.

Look for credit card offers that are really extending you something that is worth being excited about. If used responsibly, a credit card with an fantastic introductory teaser rate or a big sign on reward point bonus can be worth taking advantage of.

Since there are many compelling advantages as well as disadvantages to carrying a credit card, it makes sense to sit down and consider them altogether so you can be sure to make the most informed decision.

Let’s start with the positive:

They are convenient.

Not only is paying by credit card easy, but it is arguably safer than using cash. If you lose your money or someone steals it, in most cases it’s gone forever. However, if someone takes your card and racks up a bunch of fraudulent charges, you will not be held responsible for them. Likewise, should you need to rent a car, it is much easier to use a credit card to secure the reservation as opposed to using a debit card, which ties up actual cash in your checking account.  A credit card functions as a short term loan so that you can buy things, as opposed to a debit card which requires you to already have the entire purchase amount socked away in your checking account. As long as you pay off the balance for what you charged by each statement’s payment due date, and you will not have to pay any additional finance fees.

They provide protection.

If you order something online that never turns up or it isn’t what you expected, you can always call up your credit card company to dispute the charges if the seller refuses to reimburse you. With cash or debit card payments, this is not an option.

Some credit cards come with perks.

Rewards credit cards do just that – offer the possibility for the cardholder to accumulate reward points for every dollar spent on the card. These points can be redeemed for all sorts of things -airline tickets, various merchandise and sometimes even cash.

Now, the not-so-positive:

Credit cards make it easy to slip into debt.

Because you are given the option to pay off your credit card balance a little bit at a time and roll the remaining balance over to the next billing period, it is all too easy to become overburdened by debt relatively quickly. Interest accrue on whatever part of the balance that rolls over, so your bills grow larger even if you don’t make any new charges to the account. This can make repayment difficult. You have to stay organized and on top of your bills to make certain you are meeting your payment obligations on time. You also run the risk of ruining your credit score if you make late payment or default on what you owe. Credit card companies report all your account activity to one or all of the three major credit bureaus, which keeps tabs on everyone’s credit activity and issue credit scores. A low credit score can seriously hinder any attempts to secure a loan in the future.

Credit can be difficult to obtain.

If you don’t already have an established credit history, it may prove challenging for you to get your first card. It is likely that you won’t qualify for a card with an attractive rewards program right from the start. Your first card may have to be a secured card, which will require you to use some cash as a deposit. Other options may be to have someone you know with good credit cosign for you or apply for an unsecured card with an annual fee.

If you put some forethought into getting a credit card before you apply, you can be sure to find the right card for you!

Assess Your Credit Score

The type of account and special perks you qualify for are determined by the overall health of your credit score. The higher your score, the better the interest rate, rewards program and account terms you will have to choose form. Go online to request a copy of your credit score, which will give you a very good indication of what your credit score is like. Everyone is entitles to one free credit report per year.

Analyze Your Payment Habits

Do you have a history of paying your bills on time? Have you ever missed any payments altogether? All of this activity will show up on your credit report and while you cannot erase what is already on there, seeing what the lenders see when determining whether or not to extend you a new line of credit will be a useful tool to help you understand why it is so important to be consistent and reliable with your payments.

Study Your Spending Patterns

If you have a tendency to put all of your purchases on your credit card, consider using cash a little more often prior to applying for a new card. If a lender detected what seems like “overuse” of your cards, they may be less likely to offer you an account with the best rates and perks.

The flip side is that you have to use credit in order to build credit. If you have been practicing the opposite behavior – if you have been paying for the bulk of your purchases with a debit card or cash – then it would behoove you to dust off your credit card and make a few charges with it before submitting an application for a new account. Lenders want to see that you can use credit responsibly, and this is demonstrated by making charges and paying them off in a timely manner.

Review Your Employment Record

If you have more than a few employment gaps throughout the past few years, or if you have a noteworthy amount of job changes, be aware that card issuers may regard these things as unfavorable. This is because they are concerned about the reliability of your income and, thus, your ability to pay off your credit card balances.

Look at Who Else Has Been Looking

Lenders don’t like it when an applicant’s credit report reveals a lot of recently-made inquiries, which is why it is not a wise move to apply for a new credit card unless you really need one.

Keep An Eye Out For Errors

Mistakes can turn up on your credit report that may have a negative impact upon your overall score. Go over your report carefully to notice if there is anything unfamiliar our outright incorrect. If you see anything, contact your creditor immediately to start the process of having the mistakes removed from your record.

This guide outlines the latest technology and the pros and cons of mobile payment systems.

How it works: Most credit card apps are still just that applications on your phone that you have to open and activate in order to use. Once you have turned on your phone and opened the app you can wirelessly transmit your credit card data to the merchant’s reader. Apple is developing technology it call’s “wave and pay” that would only need to be exposed to a wireless transmitter on your phone. This technology is still be developed and would always still require some kind of confirmation or agreement to pay from the credit card holder.

Businesses in the space

Apple Inc. introduced EasyPay, an app that enables Apple Store customers to buy products with an iPhone by using its camera as a bar code scanner.

LevelUp, a service launched by social media gaming start-up SCVNGR, gives smartphone users individualized Quick Response codes for merchants to scan. LevelUp can be used at more than 180 places in the Boston area.

ROAM Data Inc., a Boston start-up that makes encrypted credit card readers that attach to smartphones or tablets and software, supports mobile commerce.

AisleBuyer also lets customers make in-store purchases with an Android or iPhone while shopping.

Square, a San Francisco company grew its business by giving customers free card readers and charging merchants 2.75 percent per swipe. In some cases this is a much lowere start up cost than installing a traditional credit card machine. Square processes the transaction and deposits the money into the merchant’s bank account.

Pro: So many people carry lots of important data on their smartphones. The ability to pay with a phone would offer one more option for merchants and it would make it fast and easy for people to pay without taking out a wallet and exposing the number on their card to anyone who might be looking to steal the number.

Con: Your data can be retrieved off of a lost cell phone. In order to use a mobile app, you must enter in credit card numbers and security passwords on your phone. Similar to mobile baking, this adat is then saved in the hardware of your phone so each time the app is used the phone can access your private information. A programmer would be able to hack into your phone if it was stolen or lost and retrieve your name, credit card numbers, expiration dates and other valuable information.

But something similar will follow them: the chip-embedded, radio-frequency-secured credit and debit cards that Europeans have used for years.