How Credit Cards Work – A Report on Swiping

“Will that be Visa, MasterCard or American Express?” A common question these days. Credit cards have become an integral part of our modern-day lives of convenience. Americans live in a world of “instant gratification”. So credit cards are a simple tool to provide that. And they do it to the tune of $1.2 trillion – and that was just in the U.S., in 1999. With the wave of online shopping sweeping the nation, that number is going to multiply like rabbits. “Hare-raising”, isn’t it? But you may be wondering just how credit cards work. Well, wonder no more – we’re going to give you a simple explanation here of the uses for credit cards and how you can integrate them – wisely – into your life.

What is a credit card?

Physically, a credit card is a piece of plastic, 3-1/8” x 2-1/8”, that carries information that allows you to make purchases now, and pay for them later. The credit card is your identification. You’ll often find that when you’re in a situation where you need ID, you’ll be asked if you have a credit card. A credit card gives you credibility in the consumer world. It tells merchants and other business establishments that you’re financially responsible – a rewarding state to be in these days.

What do all those numbers mean?

Electronically, a credit card is a pretty complex device. Everything on a credit card is a code that stands for a specific bit of information. And there’s a ton of it – some that you can see, some that’s hidden. On the face of it, you’ll find a series of numbers. While these numbers as a group, identify you, individually they identify the financial institution you deal with – the one that issued you the card.

Almost all credit card companies use a standardized system for tracking and billing their customers’ transactions. Since there are so many financial institutions using this system, to avoid confusion between credit card companies, the numbers on your credit card identify which institution “owns” each transaction. For example, the first few digits identify the financial institution, the next few are your account number, and the last digit is what’s called a “check digit”.

A check digit is an interesting security item. The process of checking your credit card number is done by multiplying the sum of the odd digits by 3, which is then added to the sum of the even digits which, when added to the check digit, will equal a multiple of 10. Isn’t technology a wonder?

What happens when you “swipe”?

We’re sure you’ve noticed the shiny black stripe on the back of your credit card. That’s the part that’s “read” when you swipe your card. And the reason you swipe your card is to send the information embedded in that stripe to the central tracking and billing system. And you’d be amazed at how much information there actually is in that stripe.

Each stripe is made up of several tracks full of microscopic magnetic particles. These particles can be formatted to represent certain information. You might be surprised that “half your life history” is on that stripe. Well, maybe not that much, but there’s definitely a lot about you in those strategically-placed little magnets. For example, one of those tracks holds your PIN, your country code, including its form of currency, and the amount that you’ve been authorized to spend.

The machine that reads all this information is called a magstripe reader. Have you ever swiped your card and it “hasn’t worked”? Most often, a quick second swipe solves the problem. However, sometimes your card can become de-magnetized by bringing it into contact with another magnet; or it can be scratched. If these things happen, those little magnets can get moved, which destroys the code and renders your card “invalid”. It’ll have to be replaced.

How is your credit card checked for validity?

When you go to use your credit card, there’s a process that needs to be followed to make sure that it really is your card, and that you haven’t overspent your limit. The smaller merchants will probably do this by phone, although technology has moved into most small establishments, replacing the phone calls with more modern technology. This technology comes in the form of an EDC (electronic data capture), which does exactly what it’s name says it does – it captures your data and sends it to the central system. EDCs are the standard today.

With the rapid growth of online shopping, your card needs to be validated online, as well. This becomes a little more complicated. But virtual terminals are being developed, enabling safe and secure transactions over the Internet.

How do you know your credit card information is secure?

When you use your card, a lot of your personal information is being sent through cables and cyberspace to the companies that process your transactions. One of the newest ways of protecting that information from identify theft, is to use a “smart” card. A smart card has a computer chip embedded in it and requires you to identify yourself every time you use the card. As soon as you’ve been positively identified, the chip in the card encrypts, or converts into code, all the information related to your transaction.

Your credit card can be your friend

A credit card is a very useful tool when you’re shopping – if you use it wisely. When you have a credit card, you can satisfy that craving for instant gratification. And you won’t have to pay for it right away. But remember – you will have to pay for it eventually. You don’t want your credit report to be filled up with late payments. That could ruin your financial life. So be a smart shopper.

As we mentioned, online shopping is the wave of the future. Online merchants have made it as easy as possible for you to spend your money. You surf the Internet and come across something you’ve always wanted. And it’s at such a great price! So go ahead – buy it. And you don’t need to worry about security on the Internet these days. Highly-secure firewall protection is being used by most online merchants. Your information will be protected. And if, by the smallest of chances, an advanced hacker does get your information, your credit card provider will only hold you liable for $50 worth of unauthorized purchases.

So join the new age of shopping – go cyber-shopping. Just think – sitting at home, at your computer, in any state of dress or undress you choose, saving money on gas and car maintenance, avoiding driving and parking hassles. Wow! This is the life! Buy what you want online – and have it delivered to your door within a few days. What could be better? So get out your credit card, get on the Internet, and go shopping!

About The Author

Gareth Marples is a freelance writer working at home providing valuable tips and advice for consumers on platinum credit cards, secured credit cards offering guaranteed approval, and credit cards offering frequent flyer miles. His numerous articles offer moneysaving tips and valuable insight on typically confusing topics.

This article on "How Credit Cards Work" reprinted with permission.