Credit Cards 101
What Are Credit Cards and How Do They Work
Accepting credit card payments can be a game changer for your business. Credit cards are growing in popularity, as 41% of consumers prefer to pay with credit cards. The number of credit cards in circulation is now three times higher than debit cards. With more customers relying on their credit cards to make purchases, businesses must keep up with the times.
Accepting credit card payments will allow you to expand your customer base and offer more payment options to existing customers. Understanding credit card processing fees and pricing models can help you get the best possible deal for your business. To get started, it's important to understand what credit cards are and how credit card processing works
What's a credit card?
A credit card is a payment method that allows the cardholder to borrow funds from the issuer for purchasing goods or services. Credit cards come with a pre-approved limit that determines the maximum amount that can be borrowed at any given time. When the cardholder makes a purchase, the amount is typically added to their outstanding balance. They're then required to repay the balance to the card issuer either in full or in installments over time.
What are the different types of credit cards?
There are many different types of credit cards available to consumers, each with its own set of benefits and features. Some of the most common types of credit cards are:
- Standard credit cards: These are the most basic type of credit card and are widely accepted. They usually come with a standard credit limit and may offer rewards, cash back, or other benefits.
- Rewards cards: These cards offer rewards, such as cashback, points, or miles, for every dollar spent. Rewards can be redeemed for merchandise, travel, or other perks.
- Travel credit cards: These are designed for people who travel frequently and offer perks like airline miles or travel insurance.
- Balance transfer credit cards: These allow cardholders to transfer balances from cards with high-interest rates to cards with lower interest rates.
- Secured credit cards: These cards require a security deposit as collateral, which is used to cover the balance in case of default. They are designed for people with no or poor credit history.
- Business credit cards: These cards are for small business owners and come with features tailored to business expenses. The card could be used for cash back or rewards on office supplies, travel, or advertising.
- Student credit cards: These cards are designed for college students and usually come with lower credit limits, lower fees, and credit-building tools.
- Premium credit cards: These cards are designed for high-net-worth individuals and come with high credit limits, premium rewards, and exclusive perks.
Of the main credit card companies—Visa, Mastercard, American Express, and Discover—Visa is the most commonly used, making up 52.8%.
What's credit card processing?
Credit card processing refers to the procedures involved in authorizing, verifying, and processing payment transactions made using a credit card. Credit card processing is important because it allows businesses to accept credit card payments from customers, which can increase sales and revenue. Credit cards are a popular payment method because they offer convenience, flexibility, and security. By accepting credit card payments, businesses can expand their customer base and provide a better customer experience.
Credit card processing is a vital part of modern commerce. It enables businesses to accept electronic payments and provide customers with a convenient and secure payment method. It also involves fees and risks, such as chargebacks and fraud, which must be managed by merchants and payment processors.
How does credit card processing work?
Credit card processing involves several steps, including:
- Authorization: When a customer uses a credit card for a purchase, the merchant sends the transaction details to the payment processor. These transaction details include the purchase amount and card information. The payment processor then forwards the information to the card network (Visa, Mastercard, etc.). The network then verifies the information and checks the customer's credit to ensure that they have enough for the purchase.
- Clearing: Once the transaction is authorized, the merchant's bank (the acquiring bank) sends the transaction details to the card network. The card network then passes the information along to the card issuer. The card issuer then deducts the funds from the customer's available credit and sends them to the merchant's bank.
- Settlement: The funds are transferred from the card issuer to the merchant's bank account, typically within a few business days. The payment processor charges a fee for processing the transaction. That fee is then deducted from the total amount transferred to the merchant's account.
The entire process is designed to be fast and secure. There are multiple layers of encryption and fraud protection involved to prevent unauthorized access to cardholder data. In addition, both merchants and payment processors must comply with a variety of security standards, such as the Payment Card Industry Data Security Standard (PCI DSS). This ensures that customer data is handled safely and securely.
What's the difference between debit cards vs. credit cards?
Debit cards and credit cards are two types of payment cards that have different functionality.
A debit card is linked to a customer's checking account. Funds are withdrawn directly from the account when the card is used to make a purchase. Debit cards are a convenient way to make purchases without carrying cash and can be used to withdraw cash from ATMs. Debit cards don't allow customers to borrow money and don't require the customer to pay interest.
Other the other hand, a credit card is a type of loan that allows customers to borrow money, typically from a bank, to make purchases. Customers can use their credit cards up to their available credit limit. The customer's credit limit is determined by the lender based on the customer's credit score. When a customer makes a purchase using their credit card, they are borrowing money from the lender, and they must repay the amount borrowed. Usually, the amount borrowed is then paid back with interest and other fees.
Some of the key differences between debit cards and credit cards are:
- Interest: Debit cards don't charge interest because customers are using their own money. Credit cards charge interest on any balances carried over from one billing period to the next.
- Fees: Debit cards may have some fees associated with them, such as overdraft fees, but they typically don't have many others. Credit cards often have annual fees, late fees, and more, depending on the card.
- Credit history: Using a credit card can help customers build their credit history by showing that they can manage credit responsibly. Debit cards don't affect a customer's credit score.
- Rewards: Credit cards often offer rewards, such as cashback or points, for making purchases. Debit cards may also offer rewards, but they're typically less generous than credit card rewards.
Overall, both debit cards and credit cards offer convenience and security when making purchases. They have different advantages and disadvantages depending on the customer's financial situation and spending habits.
What are credit card processing fees?
Credit card processing fees are the charges that a merchant must pay to accept credit card payments. These fees are typically made up of several components:
- Interchange fees: These are fees paid by the merchant's bank to the cardholder's bank and make up most of the processing fees. Interchange fees are set by the card networks. The amounts vary depending on the type of card used, the transaction amount, and other factors.
- Assessment fees: Assessment fees are charged by the card networks to cover their operating costs. These fees are typically a fixed percentage of the transaction amount and are set by the card networks.
- Processing fees: Processing fees are charged by the payment processor for the services they provide, such as authorization and settlement. These fees can also vary depending on the payment processor and the merchant's processing volume.
What are credit card pricing models?
Payment processors may use a variety of pricing models to determine their charges to merchants. The most common pricing models are as follows:
- Flat-rate pricing: The payment processor charges a fixed percentage of each transaction, regardless of the card type or transaction amount. Simple and easy to understand but may not be the most cost-effective for merchants with high-volume or high-value transactions.
- Interchange-plus pricing: Interchange fees are set by the card networks. They also charge a fixed percentage or flat fee for processing the transaction. This model is more transparent and can be more cost-effective for larger merchants.
- Tiered pricing: For tiered pricing, the payment processor groups transactions into different tiers. These tiers are based on the type of card used and other factors, and charge different rates for each tier. This model can be more complex and difficult to understand, but it can be cost-effective for smaller merchants.
Merchants need to be careful when considering their payment processing options. Merchants should always choose a payment processor and pricing model that best suits their business needs and budget.
How businesses can accept credit card payments?
Since 70% of Americans own at least one credit card, it's important to know how to accept credit cards. Businesses can accept credit card payments in a few different ways, including:
- Point of sale (POS) systems: Many businesses use POS systems that are equipped with credit card processing capabilities. These systems allow customers to pay for goods or services using their credit card and typically include hardware. Hardware could be card readers and terminals, as well as software for processing transactions.
- Mobile payments: Some businesses, particularly those that operate on-the-go or have a mobile component, use mobile payment systems. These systems allow customers to pay using their mobile devices and typically require a mobile app. Mobile payments require a card reader or terminal that can be connected to a smartphone or tablet.
- E-commerce: Many businesses sell goods or services online and accept credit card payments through their e-commerce platforms. These platforms typically integrate with payment processors to securely process transactions and manage payments.
- Virtual terminals: Some businesses may use virtual terminals. Virtual terminals are web-based applications that allow merchants to manually enter credit card information to process transactions. These can be useful for businesses that have a high volume of phone or mail orders.
To accept credit card payments, businesses need to set up a merchant account with a payment processor or bank. They also may need to meet certain requirements, such as demonstrating their credit score or complying with certain security standards. Merchants should carefully review their options and pricing models to find the best solution for their business.
How PAYARC can help merchants handle credit card payments
PAYARC offers a suite of payment processing services that help merchants handle credit card payments efficiently, securely, and cost-effectively.
- Payment acceptance: Provide tools and services merchants need to accept payments, such as card readers, terminals, and software. We can also help merchants accept other forms of payment, such as mobile payments or e-checks.
- Payment processing: Manage the transfer of funds between the cardholder and merchant's bank, and the card networks. We also provide the technology and infrastructure necessary to process transactions quickly and efficiently.
- Security: Responsible for ensuring that credit card transactions are secure and comply with industry standards. These industry standards include the Payment Card Industry Data Security Standard (PCI DSS). We also provide encryption and tokenization services to protect sensitive customer data and prevent fraud.
- Fraud prevention: Use sophisticated algorithms and machine learning to detect and prevent fraud. This helps merchants reduce chargebacks and other fraudulent activity.
- Reporting and analytics: Provide reporting and analytics tools that allow merchants to track their payment processing activity. We also allow merchants to understand their transaction volume and trends and make data-driven decisions to improve their business operations.
- Customer support: Dedicated 24/7 customer support to help merchants resolve technical issues, answer questions, and ensure their operations run smoothly.
By partnering with us, merchants can focus on growing their business and providing a positive customer experience. It's time to leave the complexities of payment processing to the experts.
Talk to an expert at PAYARC and start processing credit card payments today.