Credit Card

A credit card is a payment method that grants its user a line of credit that enables to buy products and use services that will be paid for afterwards. Physically, a credit card is a rectangular piece of plastic issued by a bank or a credit union. A credit card transactions involves several parties and has to follow a series of steps. The parties are the cardholder, i.e. the consumer; the card-issuing bank, a financial institution that issued the credit card to the consumer; the merchant; the person or business taking credit card payments for products or services sold to the consumer; the acquiring bank; the financial institution accepting payment on behalf of the merchant; the credit card association; a group of card-issuing banks that determine the transaction terms for merchants, card-issuing banks, and acquiring banks; and a transaction network, the system that enforces the mechanics of the electronic transactions.

The transaction steps are as follows: authorization (the consumer pays for the purchase and the merchant submits the transaction to the acquiring bank in order to verify the card number and the type of transaction), batching (authorized transactions are stored in batches that are sent to the acquirer once daily at the end of the business day), clearing and settlement (the acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer), funding (after the acquirer has been paid, they in turn pay the merchant) and chargebacks (an event in which money in a merchant account is held due to a dispute relating to the transaction, usually started by the cardholder).

Merchants are commonly charged a commission of around 1% to 3% of the value of each transaction, and they may also pay an interchange rate. Consumers, on the other hand, may be charged fees for late payments or overdue payments, and others.