Functionality
Agreed that we all have credit cards, make the maximum use of it and enjoy all its privileges. When you think of a credit card, you would naturally associate it with making purchases and swipe the card or in case of an online payment just give the number and whoa……. the payment is made. However we usually are unaware of what exactly happens, and the functioning of a credit card is procedural, involving many steps. In this section we would look at what exactly happens when we use a credit card and what its stages are.
a. Key Elements:
- Acquiring Bank: This accepts the payment from the merchant and in turn sends this information to the card issuer.
- Credit Card Holder: An individual that possess a credit card is a Credit Card Holder.
- Card Issuing Bank: Any credit card issuing organization or bank that issues credit cards is a card issuer.
- Merchant: Merchants are those that accept credit cards. For example: A retail store, where you buy purchases and can use your credit card for it.
b. Credit Card Transaction Process:
As mentioned earlier, when a credit card is used, the process is as follows that is represented in the form of a flow chart.
The first step in the credit card transaction is Authorization and this is as follows.
1. Authorization:
Key Elements: Credit Card Holder, Merchant, Acquiring Bank and the Card Issuing Bank.
When a purchase is made and the Credit Card Holder approves of it, the card is swiped through a card reader. This information is then passed on to the Acquiring Bank. The Acquiring Bank verifies certain information and forwards this information to the Card Issuing Bank. The Card Issuing Bank checks whether the required amount is available, and if there is no discrepancy, it sends an approval. However if the required amount is unavailable it can also reject the transaction.
The Card Issuing Bank, does not exactly deduct that amount, but holds it back. The amount of money is only charged, at the end of the day. This process is summarized diagrammatically.
2. Batching:
Key Elements: Merchant, Acquirer
Only after the merchant ensures that all the sales have been authorized and verifies the signature on them, all the sales can be sent to the acquirer, and then the money is received by the merchant. This process is called as a Batching and is the second step in a credit card transaction.
3. Clearing:
Key Elements: Acquirer and Card Issuing Bank
The Acquirer, with the use of the network sends the transaction across to the Card Issuing Bank. The Card Issuing Bank would deduct the necessary charges, issue money and sends it back to the acquirer.
4. Funding:
Key Elements: Acquirer, Merchant, Credit Card Holder
Funding is a process wherein the retail store gets their share of money paid by the acquirer, and the credit card holder is charged for the purchase that has been made.
Credit Card Numbers
A long number, usually around 15-16 digits, in sets of four that is embossed on the credit card is the credit card number.
Let us take an imaginary number for our convenience. 4421 0987 3246 4560
All credit cards possess a Credit Card Number that can be used for credit card transactions and online payments.
**Take extra precautions of your Credit Card Number, as this is the easiest way for credit card fraud to take place.
The very first digit on the credit card is called as the MII which is the Major Industry Identifier; this number helps in identifying the industry to which the credit card is used for. As we have learnt earlier that the credit cards are used widely and some commercial enterprises like the Petroleum, Airlines exclusively have their own credit card system. Therefore the first digit helps in the identification of the related industry.
What You Need To Know?
The banking industry usually holds the number 4, 5 or 6.
**Check to see whether you’re Credit Card has either of these numbers.
The digits of the Credit Card Number represent certain details that need to be understood. All American Express credit cards possess only a 15 digit number, whereas other credit cards have 16 digits.
These numbers represent information that conveys certain details. Using the example 4421 0987 3246 4560
The first digit that we looked at is the MII number.
The first six digits denote the issuing body or the organization that issues the credit card; this is referred to as Issuer identification number (IIN). However even with the first six numbers, the first number differentiates the credit card network, from which the credit card is from. 3 - Indicates that this belongs to American Express. 4 - Denotes that this credit card relates to Visa. 5 - Means that the credit card belongs to Master card. 6 - indicates that this is a Discover card number.
The other numbers apart from the first six and except the last number is the Personal Identification Number.
So in this case the personal identification number is 87 3246 456.
The last number is the check digit. In order to understand this we need to understand the Luhn’s algorithm. The Luhn’s algorithm was devised by Hans Peter Luhn, and the description is as follows.
Take a credit card number, and multiply 2 with every odd/alternate number. If the product is 10 or greater than 10, subtract it with 9.
For Ex:
4421 0987 3246 4560
(4*2)+4+(2*2)+1+0*2+9+(8*2-9)+7+(3*2)+2+(4*2)+6+(4*2)+5+(6*2-9)+0
8+4+4+1+0+9+7+7+6+2+8+6+8+5+3+0= 78
Since this number is not a multiple of 10, it can be deduced that this is an invalid number.
The same holds good for an odd digit number, however the even numbers have to be multiplied here, to check its reliability.
About Issuers & Network
Credit Card terminology may leave us all muddled up, but we need to understand these intricacies and also differences between certain credit card aspects. We are all familiar with MasterCard, Visa, Discover and American Express as they function as the middlemen between the merchant and the card issuing bank. All of these are globally renowned and can used from anywhere.
a. Credit Card Companies:
All Credit Card Networks need not be Credit Card Companies. From among the four Credit Card Companies we have seen above, only American Express and Discover are Credit Card Companies and Visa and MasterCard are only Credit Card Networks. American Express and Discover are also Credit Card Issuers as they issue their own credit cards, whereas the Visa and MasterCard usually collaborate with other banks and financial institutions and therefore are only Credit Card Networks.
b. Co-branded Card:
When there is collaboration between two or more organizations on a credit card, like the issuing organization alongside airlines or some store, the card would be termed as a co-branded card. This way the credit card holder would get a lot of rewards, on the credit card usage. Apart from the Co-branded cards they are affinity cards, where based on the usage of the credit card, an amount gets allotted for a charitable purpose.
Credit Card Processing
In this age, where credit cards rules! Being an owner of a commercial enterprise, and planning on setting up your own business, would entail a lot of groundwork before beginning.
You would need the following:
- Internet facility
- Phone
- Card Reader
- Shopping Cart
Without establishing a merchant account there is a possibility through PayPal. PayPal accepts payments on behalf of your business, processes the transaction and eventually you get paid for it. You can have a regular website where shoppers can choose and shop whatever they want, and purchase the item. The payment can be made through PayPal; the transaction fees however would be minimum. You can also accept all kinds of credit cards. Apart from shopping online, another option could be where you email the customer and the payment is made by them via PayPal. In PayPal there are no monthly fees or any additional charges.
If you are particular in having your own merchant account, you can explore the possibilities of trying out various Credit Card Processors. The bank usually seems as a viable option, as a Credit Card Processor. The ideal Credit Card Processors would be with American Express, Discover, Visa and Master Card. A thorough scrutiny of your company would be done, where all your prior financial dealings and credit history will be checked.
a. Online Processing:
For an online payment transaction, a website is required so that the customer can browse through the site and select the required product. The shopping cart software enables people to shop many items and calculates the amount, and basically permits the online payment. The payment gateway authorizes online payments and also offers security for the transactions.
b. Phone Processing:
The transactions can be made through the phone as well. The process involves calling the number prescribed and following the voice message and getting the approval.
c. Checklists for Credit Card Processing:
- Analyze the enormity of the credit card business and see whether you need to establish a merchant account or not.
- Establish a merchant account if necessary
- Find out the details on how much of time it would take for the transaction
- Check out the monthly payments, additional charges etc.
- Take extreme security measures as huge amounts of money will be involved.
Having a business that deals with second hand products or goods sold at throwaway prices does not mean that you cannot accept credit cards. The use of credit cards are now permissible anywhere and if you can afford a laptop with the internet facility you can go for online transactions. However phone processing of credit cards is also acceptable.
Being customer friendly is very important for any business, and to keep up with the flow of the customers you need to make sure that the payment modes are as per their convenience. A variety of payment modes indicate a good business, so get started on establishing a merchant account and making way for online processing and phone processing.
Consumer Rights
Having a credit card is not sufficient; you should also be knowledgeable and aware of the Credit Card Rights. These rights are for your benefit and you should familiarize yourself in order to use them appropriately, when needed.
a. Equal Credit Opportunity Act (ECOA):
This Act, without any constraints gives an assurance that everyone can opt and utilize the benefits of credit, without any discrimination. There should be no discrimination on the basis of sex, race, color, age, income or marital status.
b. Fair Credit Billing Act (FCBA):
Sometimes when you get an enormous bill and are sure that you have not made these purchases, the Fair Credit Billing Act (FCBA) will come to your rescue. This has been introduced so as to curb illegal and unjust billings. The Fair Credit Billing Act, issued by a federal law, is in the interest of the customers and safeguards them when the billing has been made, which is either through an error, unauthorized usage or even purposefully. As per the law there, the procedure is that this discrepancy should be brought out by the card holder within sixty days of when the bill has been issued. After this notification the issuing organization would have some time to rectify these errors, the upper limit of time being around three months.
c. Fair Credit Reporting Act:
The Fair Credit Reporting Act, a federal law issued in the interest for the customers stating that all the information in the credit report should be without any error. The credit card holder can check the credit report and expose the errors or discrepancies.
d. Fair Debt Collection Practices Act:
This Act emphasizes that all those in debt and unable to pay their debt should not be levied harsh treatment by the debt collectors.
e. Truth in Lending Act:
The Truth in Lending Act (TILA) is a federal law regarding the issuers, which states that the issuers ought to be truthful in their lending, in stating their charges, interest rates, late payment fees and other requirements.
Cosigner
Even before we get into the subject of co-signing and the role of a cosigner while applying for a credit card, we should have a fair idea of what this term entails. A cosigner is that person who willingly takes the liability of making the payment when the primary applicant with whom he/she is entering into a contract fails to make timely payments or conjures up on himself/herself debts. There are several credit card issuers who need a cosigner who actually acts as a guarantor to process application for student credit cards or credit cards for people who have poor credit history or have a income that does not qualify for certain credit cards.
However, in order to be a cosigner, the person should be very clear about the fact that, it may damage his/her own credit history and be very sure whether or not the act is really worth taking the risk. A cosigner, moreover, cannot use the credit card that the primary applicant is applying for and has to merely be responsible for the late payments and the debts. He also has to provide the information for the applicant.
Generally it has been seen that parents help their children to build up that first credit line or get the credit card and agrees to be a cosigner. But you really need to be careful and take into consideration whether you have the means to pay the debts without hurting the credit history of your own. Moreover, while signing try to know every one of your responsibilities that being a cosigner you are taking up on yourself and try to negotiate on certain terms if you can manage to pay only the main amount of the late payment and not the additional charges. You should also ask the card issuers to minutely notify you in case of any late payments so that you can avoid the situation where it is too late and have to come up with a huge amount which cannot pay without damaging your own credit history. Once you are sure of all these terms and conditions then make up your mind and carry on with your task of helping someone with their credit card.
Card Activation
Applying for a credit card and receiving it is not enough to make it ready for usage. You need to activate the card as well. Now many people may harbor the idea that getting the card itself means activating it. But there is usually particular number on a sticker on the front or at the back of the card where the customers need to make a call in order to activate it. Usually credit card issuers activate the card through this phone call only and not over internet to avoid the fraudsters.
Now here are certain points and aspects that you should know about activating your credit card. Just have a glace to equip yourself better while handling this important card.
- While most of the credit card issuers send you the card over mail with a number to call and activate the card, many other issuers are there which require you to go to the ATM center and activate the card with the PIN number.
- The activation of the card is one of the steps that is taken by the card issuer to protect the consumers. That is why, while activating the card over phone one has to go through several questions pertaining to personal information like the last four digits of the social security card or other information that you may have provided while filling up the application form.
- There are certain credit cards as well which need merchant activation. This is a process in which when you use your credit card for the first time it is considered to be activated. But in case a customer owns an emergency credit card and it has merchant activation scheme, then the customer should let the issuers know that he/she has got the card but is not ready to use the card right away.
- Most of the time in case of credit or debit cards which are reissued there is no additional activation. Yet if there is any, generally the card issuers let their customers know about it.
But there are certain cases in which you should not accept or activate the credit card. Knowing about situations like these and acquiring knowledge about it helps you to avoid unpleasant and unnecessary troubles. Have a glance at some of these:
- You should not activate a credit card which you have not applied for and yet have reached you.
- Situation may arise also where you have applied for the card and received it and then you read the terms and obligations which you are unwilling to follow. In this case you should not activate the card as that will mean that you are accepting the terms. You should deactivate the card if do not wish to follow particular obligations.
While these are some of the information that will help you in an easy activation of your credit/debit cards, remember that there are generally certain period of time within which you should activate your card or otherwise your account may be blocked and you have to reapply for a card.
Smart Ways To Use
Having a credit card may be alluring in a number of ways. You do not need to carry the extra burden of cash which leads to some extent of safety and security; you can make payments in case of urgencies when you do not have the money with you and so on. But there are flip sides as well and chances are that, if you fail to make a wise use of your credit card, you can find yourself in a middle of a financial mess. Now, no one would like to face this situation and here is our guide with simple ‘To-Do’ list to follow that can help you to make a good use of your credit card.
- What is the main attraction that you think allures a person to apply for a credit card at the first place? Well, no doubt the answer will be the facility to spend or purchase when you don’t have enough cash with you. But this tendency can lead you to serious financial troubles like heavy debt if you do not control the habit of the impulsive purchasing. So, it is advisable, no matter what those glittering advertisements show and make you believe about your credit cards, don’t just jump on to mindless spending spree without having a serious consideration about your ability to make the monthly credit bills.
- Well, while talking about paying the credit bills, here is another suggestion for you that you can make good use of. Usually, if a cardholder stays within the limit of 30% of the credit it generally leads to a good credit score as it makes your balances low.
- But if one cannot maintain his/her expenses and for some reason or other is unable to make the monthly bill payment, they should let inform the creditor much earlier than the date of payment and ask for a consideration.
- Rather than facing this situation, will it not be wise to follow the ways that will help you to make your payment regularly and make a good credit history? Well, shunning the habit of making the minimum payment is another way that can help you to regularize you credit bill payments. When you make minimum payments it increases not only the interest rate but also it extends the time limit in which you can pay off the entire debt and this can lead you towards additional charges and fees.
- While understanding your financial situation of what you can afford to buy or spend helps a lot in making a wise use of the credit card, it can lead you to many other financial gains as well. When you build up a good credit history behind you, it can help you obtain low interest rates on huge loans.
- Another point that you should remember while making a good use of your credit card is that don’t close a credit card suddenly without considering about the risk. It may damage your credit scores especially if it carries balances.
But along with these simple tips using your credit card in a better way will always depend on your own consideration. So, first of all have a clear idea about your potentiality to afford the credit card bills and then go on with using it the way you want.
PIN
PIN or Personal Identification Number is a four digit numeric identification code that the cardholder has to use in ATMs and sometimes with several merchants. This PIN is used to validate the identification of the user and is used between the cardholder and the system.
Some points about PIN at a glance:
- When a cardholder gets his credit/debit card the PIN number is also sent by mail. But usually the card and the PIN number are not sent together for security purposes and the cardholder has to wait for sometime to get the PIN number of his/her card.
- A PIN number is generated automatically and is among 0000 to 9999. Though there are some card-issuers who do not generate PIN number that are too obvious like 1234 or starting with 2-3 zeroes.
- The PIN number that a cardholder receives originally can also be changed at the cash points. What he/she has to do is to insert the card in the slot and follow the option of the PIN change by first entering the original PIN number.
- In case of card theft or lost, a customer need to inform the authority and block the card and ask for a new one. In this case, they are provided with a new card but generally the PIN number remains the same until the customer ask for changing that also.
- Now-a-days, especially after the introduction of the “chip and PIN” method in the year 2006, the importance of the PIN number has increased. This is because to stop the fraudsters, now the customers need to produce their PIN number while making any payment at the merchants or any outlet while using the cards.
While the card issuers try their maximum to protect the security of your card, it is your responsibility as well to take care of the PIN number and protect it to protect yourself from the fraudsters.
Credit Piggyback: A Fun or Fatal Ride?
a. What is Credit Piggybacking?
When the general idea of piggy backing is applied to boost up someone’s credit score, that backing up or help is counted as Credit Piggybacking.
b. How does Piggybacking works?
When a person with bad or poor credit scores gets himself added to someone else’s credit cards, having high credit scores, as an authorized cosigner it immediately increases the credit score of that first person. Now, while this has mostly been done by parents to help their children get their first credit card or build up a good credit line, at present it has become a sort of business also. There are certain websites where a person can avail this piggybacking spending some money.
c. Consequences of Piggybacking:
Piggybacking may sound and prove in some cases very profitable, but this process has a number of drawbacks as well.
- Getting someone to piggyback for you means that you have to disclose your name as well as social security number to that person or agency. This can lead to the high risk of your identity being stolen and put in some illegal use.
- Consider the fact that, when someone else is piggybacking you that person will get the credit card offers in his/her mail in your name which he/she can easily misuse at your expenses.
- Moreover, the person who is offering the help of piggybacking is putting himself/herself at risk also. This is primarily because, in case of any misuse of the credit card, his/her credit scores will be damaged.
Consider first of all, why you need someone to piggyback your credit. Is it because you need a loan? If so, then rather than relying on the FICO score, try to get a loan giver who does not go by a mere number to determine your ability of paying back the loan rather consider all other aspects. This will steer you clear out of the loopholes of piggybacking for sure.
|
|