How A Credit Card System Operates?

credit card as a boatOnly a rare few can go without a credit card these days, and Filipino people won’t be an exception. Yet, many use one without fully understanding how a credit card system works. So let’s start with the basics:

What does a Credit Card mean?

Credit cards are described as “plastic money”, coming in the form of a plastic 86 x 54 mm card, which allows cardholders to make cashless transactions. Credit card holders are allocated a “credit limit” by the bank, which is the maximum amount the bank agrees to lend you for these transactions.

When applying for a card, we are often able to choose between different companies – American Express, MasterCard or Visa. But what are the roles of these companies? Why do banks need them?

What happens after I pay the bills using my Credit Card?

Here are the parties involved in every credit card transaction, each vital to a smooth payment process. This will give you a sense of who’s who:

Credit Card System

To simplify matters, let’s say you enter a shop to make a purchase with your credit card. The cashier swipes it through a credit card reader/terminal.

Credit Card System

The credit card’s magnetic stripe is read by the reader/terminal reads, which sends key information (e.g. credit card number, credit limit, expiration date etc) to the merchant or shop owner’s bank

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The merchant’s bank receives this information and checks the transaction’s validity.

Credit Card System 3

The merchant’s bank sends the transaction’s information to the corresponding credit card company (i.e Visa, American Express, or MasterCard).

Credit Card System 4

Then, the credit card company contacts your bank and verifies your credit card.

Credit Card System 5

Upon your bank’s confirmation, the credit card company forwards the message to the merchant’s bank, which approves your transaction.

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1.0                The payment is made…what’s next?

No cash has “exchanged hands” just yet. Here’s what happens next:

2.0                How credit card payment works

At the end of each month, the merchant gives the bank all its transaction receipts (remember that receipt you sign when you buy something with your credit card?)

The bank then pays the merchant the total receipt amount.

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Simultaneously, the merchant’s bank sends a request to the credit card company asking for a settlement (or payment).

The credit card company pays the merchant’s bank, and concurrently sends a payment request to your bank.

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Your bank pays the credit card company, and proceeds to charge you for the amount you owe on your purchases.

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And that’s essentially how a credit card works!

Keen to learn more? Check out the rest of our articles about credit cards.

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