What is credit card

 

 

A Credit card is a payment card issued by financial institutions (such as banks or credit unions) that allows the cardholder to borrow funds up to a predetermined limit to pay for goods and services. It’s a convenient financial tool that comes with responsibilities and costs.

Advantages of Credit Cards

• Convenience: Accepted globally and eliminates the need to carry cash.
• Security: Safer than cash; fraud protection often included.
• Rewards: Earn points, miles, or cashback on purchases.
• Emergency Funds: Useful for unexpected expenses.
• Building Credit: Establish and improve your credit score with timely payments.

Disadvantages of Credit Cards

• High-Interest Rates: Carrying a balance can lead to costly interest charges.
• Debt Risk: Easy access to credit can lead to overspending.
• Fees: Potential for various charges, including late fees.
• Impact on Credit Score: Late payments or high utilization can harm your credit score.

 

Credit card processing

 

 

Credit card processing refers to the series of steps involved in authorizing, verifying, and completing a payment made with a credit card. Whether you’re a small business owner or a consumer, understanding how it works can help you navigate this essential aspect of commerce.

How Credit Card Processing Works

The process typically involves the following steps:

1. Cardholder Makes a Purchase
   • The customer uses their credit card to pay for goods or services, either in-person, online, or over the phone.
2. Payment Information is Sent to the Merchant
   • The card is swiped, inserted, tapped, or entered online, and the payment details are transmitted to the merchant’s point-of-sale (POS) system.
3. The transaction is Sent to the Payment Processor
   • The payment processor acts as the intermediary, sending the transaction details to the card network (e.g., Visa, Mastercard).
4. Card Issuer Authorizes or Declines
   • The cardholder’s bank checks for available funds, fraud indicators, and other criteria to approve or deny the transaction.
5. Authorization is Sent Back to the Merchant
   • If approved, the merchant completes the sale. If declined, the customer is notified.
6. Settlement and Funding
   • At the end of the day, the merchant submits a batch of authorized transactions for settlement.
   • The issuing bank transfers funds to the merchant’s bank, minus any fees.

Key Players in Credit Card Processing

1. Cardholder: The individual making the payment.
2. Merchant: The business accepting the payment.
3. Payment Processor: The service that handles transaction details between the merchant, card network, and bank.
4. Card Network: Brands like Visa, Mastercard, American Express, and Discover.
5. Issuing Bank: The bank that issued the card to the cardholder.
6. Acquiring Bank: The bank that receives payments on behalf of the merchant.

Costs Involved

Merchants typically incur fees for credit card processing, including:

1. Transaction Fees: A percentage of the sale (e.g., 1.5%–3.5%) plus a flat fee (e.g., $0.10–$0.30).
2. Monthly Fees: Some processors charge a flat monthly fee for services.
3. Setup Fees: Fees for initial account setup.
4. Chargeback Fees: Fees for disputed transactions.

Types of Credit Card Processing Systems

1. Point-of-Sale (POS) Terminals: Used in physical stores.
2. Mobile Card Readers: Portable devices for in-person payments.
3. Online Payment Gateways: Facilitate e-commerce transactions.
4. Virtual Terminals: Allow manual entry for phone or mail orders.

Popular Credit Card Processing Providers

1. Square: User-friendly, ideal for small businesses.
2. PayPal: Known for its simplicity and integration with online platforms.
3. Stripe: Excellent for online businesses with developer-friendly tools.
4. Shopify Payments: Great for e-commerce stores using Shopify.
5. Clover: Robust solutions for in-person sales.

Choosing a Processor

When selecting a credit card processor, consider:

• Fees and Costs: Compare rates, hidden fees, and contract terms.
• Features: Look for features like analytics, fraud protection, and support for multiple payment methods.
• Integration: Ensure compatibility with your existing systems.
• Customer Support: Reliable 24/7 support is critical for quick issue resolution.