How Credit Cards Work

The credit card, that little piece of plastic that people love and hate at the same time, gets used millions of times all over the world.  It almost never fails, yet hardly anyone has appreciation for the process a credit card goes through for each transaction.  Well, for those who are curious read on, as this article will thoroughly explain how credit card services works.

What gives life to a credit card is the magnetic strip that runs along its side.  To the eyes of the consumer this strip looks like a thick black line.  The strip consists of thousands of magnetic particles, each of which are very small.  The data associated with the credit cards get stored within these particles.

Organization of the data is done through three special tracks within the magnetic strip.  The first two tracks store general information about a person’s account.  Examples include their credit card number, the expiration date on the credit card and the person’s name.  Any extraneous information that is deemed to be more specific gets stored in the third track. 

When a person makes purchases from a credit card through brick-and-mortar stores, data from their card gets sent to its associated bank through a point-of-sale terminal.   What is a point-of-sale terminal?  It is an electronic device that contains a magnetic strip reader.  The magnetic strip reader records information from the credit card’s magnetic particles each time a clerk swipes it.  The data that is acquired then gets sent out through a network connection. 

Once a card reader reads the credit card, the information imbedded in the magnetic strip is transmitted to the credit card merchant processor.  The account information is read along with verification that the account has the necessary amount available credit and is in good standing.  Upon authentication of this data, the purchase transaction is approved.

Most modern-day point-of-sale terminals will also include a signature capture pad.  With this feature a person must provide their signature before the point-of-sale terminal can send off data to the bank affiliated with the credit card.  By requiring a signature before a purchase can be made, credit card companies are at an advantage when it comes to fraud detection.  This is because if a credit card has been stolen and the signature given doesn’t match the owner’s, credit card companies automatically know that theft has occurred.

What if a credit card purchase is made on the phone or online?  In these situations no physical swiping can occur, so the information that is normally transferred through a card’s magnetic strip must be obtained through written or verbal communication from the customer.  This includes asking the customer for their credit card number, its expiration date and in some cases the validation code.  The data is sent either through a telephone call or credit card online.  Either way, the process is electronic, so approval can be sent instantly. 

Where does the future lie for credit card technology?  Credit card manufacturers seem to want to go more towards eliminating the need for the magnetic strip in the first place.  This is already occurring for Internet or phone purchases, so it just needs to be expanded for purchases that are made in-person.  The technology that is being used to experiment with this concept involves creating contactless credit cards.

Contactless credit cards do not have a magnetic strip.  Instead, data is stored in a smart chip.  A contactless card reader reads this smart chip similar to the magnetic strip reader.  From there the process is the same as if the card contained a magnetic strip; any relevant data gets sent to the bank.  If there are enough funds, the transaction will get approved. 

The technology behind the inner-workings of credit cards is still evolving to make transactions convenient and secure.  Of course, there are times when it can succumb to system failure, but for the most part credit card technology is highly effective.  And it will continue to be so, as long as people find the need for them.  Of course, the best credit card for you will probably have very little to with the transaction mechanics and more to do with the credit card interest rate and features.