How Does Credit Card Processing Work?

Credit card processing happens in three phases: authorization, clearing and settlement;

Authorization

The first phase is credit card authorization, which typically only takes a few seconds.

1. A customer pays for a purchase with a card at a point-of-sale (POS) terminal in a store, online or by mail order/telephone order (MOTO).
2. The merchant submits an online authorization request for the charge amount to the merchant bank. This request is usually transmitted through a POS terminal or payment gateway.
3. The authorization request is routed through the appropriate card network to the issuing bank.
4. The issuing bank reviews the cardholder’s account and approves or declines the transaction. If the transaction is approved, the issuing bank places a hold on the cardholder’s credit limit for the amount of the charge.
5. The issuing bank sends the approval or denial back through the card network to the merchant.

Clearing

The second phase is the clearing process, which is how payment information is communicated through the card network.

1. The merchant electronically sends batches of authorized card transaction data to the merchant bank, typically at the end of the business day.
2. The merchant bank forwards the transaction data through the card network to the issuing bank.
3. The issuing bank receives the transaction data and converts the hold on the cardholder’s account to a charge that will appear on the cardholder’s monthly billing statement.

Settlement

The final phase is the settlement process, which typically occurs the day after the clearing transaction is submitted to the card network.

1. The card network establishes the net positions of all settlement participants (i.e., issuers and acquirers), collects funds from the issuing bank and transfers the funds to the merchant bank.
2. For cross-border transactions involving more than one currency — such as when a card issued in one country is used for purchases in another country — foreign currency exchange is handled as part of the settlement process.
3. The merchant receives either a gross settlement or a net settlement. In the case of a net settlement, the merchant receives the transaction value minus fees. In the case of a gross settlement, the merchant receives the full transaction value and is periodically invoiced for the fees due to the various parties.

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What is a Card Processing Network?

A card processing network (also called a credit card processing network) is a financial organization that facilitates card-based payments. Some of the most common card processing networks are Mastercard, Visa, Discover, and American Express (AmEx), as well as UnionPay in China.

In 2022, Visa was the most popular card processing network with 242 billion total card transactions (followed by 213 billion for UnionPay and 150 billion for Mastercard).

What these card networks do is fairly straightforward: they offer infrastructure for digital payments. They create the rules and pathing that makes it possible to accept, authorize, verify, and ultimately approve card transactions. You may hear the term debit or credit card “rails” - which refers to the infrastructure that enables card-payments. It’s an apt metaphor - think of the card brands as the railway company that lays down the train tracks. They manage and standardize the construction of rail lines, set rules for the signals and practices locomotives must follow, and bring order and safety to the world of commerce. 

For many years, accepting payments from one or many payment networks was a hassle — but the credit and debit card business was still a backseat to cash. We now live in a world which spends on plastic and many merchants now support all four major payment networks. There are now thousands of debit card and credit card products in addition to card-products like gift cards. These are created by card issuers (often working with a partner, such as an airline or your favorite retailer) that work with the card networks. These issuing banks and financial firms offer cards in partnership with one of these payment networks. 

Visa, Mastercard, Discover, and AmEx also form the PCI Security Standards Council (SSC) alongside Japan’s JCB International. The PCI SSC acts as an authority in the payments industry, regulating and enforcing the PCI Data Security Standard (DSS) to protect cardholder information.  The rules set by this consortium are not guidelines, but the ground-rules participants must abide by in order to participate in card-payments. While the card processing networks establish a smooth infrastructure for card payments, they also make requirements of the other players, principally to ensure a safe-processing environment for cardholders. This includes both in-person payments and digital payments, though networks have placed an increasing amount of emphasis on optimizing digital payments over recent years with the surge in card-not-present volumes and activity. 

As such, card processing networks not only facilitate card payments but also outline the rules and requirements for merchants to follow when accepting card payments. Overall, card processing networks enable merchants to accept, authorize, and approve card payments. Source

Do Cell Phones Demagnetize Credit Cards?

In general new credit cards with EMV technology are far less likely to become demagnetized by cell phones or other magnetic items. However, Wireless charging has a much stronger magnetic field, so it’s worth removing hotel key cards, subway, and other travel cards from a phone case before charging.

What is a Demagnetized Credit Card?

If you can cast your mind back to elementary school when you learned about how magnets repel, and how the magnetic field is affected when two magnets come in close contact, then you are on the right track. 

Magnetic fields can be affected when credit cards come in close contact with other materials that are magnetized.So when your credit card and other magnetized items come in fairly close contact, the magnetic field is affected and it can actually stop your card from working. Luckily you’ll be pleased to know that for any long-term damage to occur it would take a number of magnet interactions. “Magnetic fields can be affected when credit cards come in close contact with other materials that are magnetized.”

Why is the magnetized strip not working on your credit card?

If the magnetic strip is damaged on your card, the card reader that you either swipe or insert it into won’t be able to receive information such as your credit limit, account number, or available funds. The reader needs to retrieve that information before it processes the transaction. This is what’s known as demagnetization. Although general wear and tear to your phone is the usual culprit, prolonged exposure to magnetized items over time can ruin the magnetized strip. In general most of the newer credit, debit and store cards we use usually has EMV technology. This has all but replaced the old type and in general, is more robust when it comes into contact with another magnet. “In general most of the newer credit, debit, and store cards we use usually have EMV technology.”

Will my cell phone demagnetize my credit cards?

It’s worth knowing that the magnetic field on your phone is located in your phone's speaker. In general, the magnetic field on your phone speaker is too weak to cause too many problems. So it shouldn’t cause any damage to the magnetic strip on your credit card.

This is one of the reasons that your phone doesn’t randomly attach itself to a paper clip or other small metal items. Almost all newer cards we use these days have a chip inside them which means your phone won’t have the power to wipe information off your card if it passes by your phone speaker. What a relief. The natural deterioration of your card will mean that the strip might begin to lose magnetization and even if you do keep your credit cards separate from your other cards, it may still need replacing. Ok, so although the newer credit cards with EMV technology don’t seem as susceptible to losing magnetization, is it the same when you charge your phone? “In general the magnetic field on your phone speaker is too weak to cause too many problems.” Source

5 Lessons Credit Card Beginners Need To Learn

 

 

This video covers everything from credit utilization, payment history, how to build your credit score, and how to use your credit cards responsibly when you’re just getting started as a beginner.

Happy Fathers Day!

 

Happy Fathers Day! Hope you spent the day doing something you love and spending time with the people you love. 

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What Makes Up Credit Scores?

What makes up credit scores?

Credit scores are calculated using information found on your credit reports, including your history of repaying debts on time, how long you’ve had a loan or line of credit and the total amount of debt that you owe. The most widely used credit scores by lenders are FICO® scores. Most credit scores fall between 300 and 850. A higher score generally makes it easier to get approved for a loan or credit card and secure lower interest rates.

What information is on a credit report?

A typical credit report usually will include your name, address and date of birth, along with the following information about your credit history:

• Your accounts — This includes both open and closed accounts such as credit cards, mortgages and other types of loans such as auto, personal or student loans. It also includes the length of time you’ve had each account open.
• Payment history — Creditors and lenders typically report to the credit bureaus whether you’ve paid your bills on time. Late payments and accounts in collections are reported. And if you’ve filed for bankruptcy, that could show up too.
• Available credit — Your reports will also show how much credit you’re currently using. If your credit cards are maxed out, this could affect your overall credit scores.
• New credit applications — Any time you apply for credit, this will show up as a hard inquiry on your credit reports.

What doesn’t show up on a credit report?

Like income, there are some other factors that won’t appear on your credit reports. These include your race, gender, marital status, nationality and whether you’re receiving any kind of public assistance.You also probably won’t see any of your bank transactions listed or certain types of bills, including rent, mobile phone or cable TV. Source

Does Income Affect Credit Scores?

Your income doesn’t have a direct impact on your credit scores. When you review your credit reports, you’ll see that there’s no mention of income. Instead, your credit reports will show your payment history, current debts, your location and your employer. And if you’ve been involved in any lawsuits, arrests or bankruptcies, those may be listed too. 

Salary vs. income

It’s important to understand the difference between income and salary — they’re not quite the same thing. Your salary is the money you earn from working. Your income, on the other hand, includes your salary but also other sources of money you may receive such as Social Security, unemployment, alimony or retirement distributions. 

How your income may indirectly affect credit health

The money you bring in each month could play an indirect role in your overall credit health. Here are a few ways how:

• Debt-to-income ratio

Your debt-to-income ratio is a calculation of all your monthly debt payments divided by your gross monthly income. Lenders use this ratio to help figure out if you earn enough each month to cover paying back the money you want to borrow, whether it’s in the form of a loan, mortgage or credit card payment. If your debt-to-income ratio is high, this could be a red flag to lenders, and you might have trouble getting approved for new credit. Creditors may feel that you’re already stretched so thin with your existing debt that you won’t have enough cash to cover a new payment. If you’re a homeowner, a good rule of thumb is to keep your debt-to-income ratio under 36%, including your mortgage payment. Renters should consider maintaining their debt-to-income ratio much lower — at about 15% to 20%, not including rent. If your debt-to-income ratio is above those benchmarks, you might want to look into ways you can tighten up your budget. 

• Ability to pay bills

The amount of money you bring in each week or month — whether from a salary or other income — can directly affect your ability to pay bills, including your rent or mortgage, utilities or car payment. If you lose some or all of your expected income, it might be hard to keep up with all of your bills. But take note: Late payments may be reported to the credit bureaus by your lender, which could lower your credit scores.

• Access to credit and loans

People with higher credit scores tend to lock in lower rates, which could help save money on interest in the long run. But in addition to credit history, some lenders may look at other factors to determine risk, such as your employment history and proof of income. Source

Hard vs. Soft Credit Checks: What You Should Know

Whether you’re buying a car, getting a mortgage, or even applying for a credit card, credit is an important part of everyday life. At its most basic form, credit is an evaluation system that allows you to borrow money or make purchases now with the promise to repay later, typically with interest. Your credit score, a number ranging from 300 to 850, represents your creditworthiness based on your financial history. Lenders will use this score when reviewing applications to evaluate how likely you are to repay your debts.

Credit scores are influenced by factors such as your payment history, amount of money you currently owe, length of credit history, new credit, and what types of credit may be utilized. Understanding how credit works as well as how your credit score is determined are both essential for making informed financial decisions and managing your borrowing responsibly.

Benefits of Good Credit

A strong credit score opens opportunities and offers a range of valuable benefits. One of the most significant benefits is access to loans with more favorable terms. Lenders are typically more willing to offer loans to individuals with strong credit scores because they are seen as lower-risk borrowers.

Good credit may also provide opportunities for lower interest rates on loans and credit cards. Lower interest rates typically save you a substantial amount of money over time, ultimately making borrowing more affordable. Additionally, having good credit usually makes it easier to rent an apartment, get favorable insurance rates, and even land certain jobs that require a credit check.

Building Credit

Keeping the benefits of credit in mind, building credit responsibly is essential for long-term financial success. Many borrowers start their credit-building journey by applying for a credit card. While establishing credit early is important it’s just as crucial to avoid over-relying on credit cards without fully understanding their impact. Be sure to make regular, on-time payments for bills in your name, such as utilities or a phone plan, as these demonstrate financial responsibility.

Another effective option to build credit is a credit-builder loan, which allows you to make small payments that are reported to the credit bureaus. You might also consider a secured credit card, a credit card backed by a cash deposit, to help establish your credit history while minimizing risk. By focusing on responsible borrowing and consistent payments, you'll build a strong credit foundation for the future.

Hard Credit Checks

A hard credit check, also known as a hard inquiry, happens when a lender or financial institution reviews your credit report to make lending decisions. This process may slightly decrease your credit score and will stay on your credit report for up to two years. To avoid any potential negative impact, it’s advisable to limit the number of hard inquiries as frequent checks indicate to lenders that you may be a higher-risk borrower.

Hard inquiries are necessary for applications involving significant credit accounts like mortgages, loans, or new credit cards. An example of a hard credit check when applying for a mortgage would be when you submit an application to a bank or lender for a home loan.

As part of the approval process, the lender will pull your credit report from one or more of the three major credit bureaus (Equifax, Experian, or TransUnion) to evaluate your financial history, creditworthiness, and ability to repay the loan.

Soft Credit Checks

Soft credit checks, often referred to as soft inquiries, happen when your credit report is accessed for purposes that do not involve lending. Examples include background checks by potential employers or when you check your own credit score.

These inquiries differ from hard credit checks in that they do not impact your credit score and are not visible to other lenders who might review your report. Soft inquiries provide a snapshot of your credit without the consequences of a hard inquiry, making them a useful tool for lenders and other parties to assess your creditworthiness without affecting your score.

This type of check is often used for marketing purposes, allowing companies to offer pre-approved credit offers based on your existing credit profile. Understanding the nature of soft credit checks helps better manage how and when your credit report is accessed.

Regularly monitoring your credit report is a key tool in maintaining your financial health. By keeping an eye on your credit, you'll quickly spot inaccuracies or fraudulent activities that could negatively impact your score or borrowing abilities. Many online services offer free access to your credit report and score, allowing you to stay updated. The score provided by these online services is an estimate and may differ from scores pulled by lenders or other sources. Credit scores may also vary depending on which of the three major credit bureaus you use, Equifax, Experian, or TransUnion, as each might review slightly different data. Different scoring models like FICO and VantageScore also result in variations. Source

What Is Credit Card Processing and How Does It Work?

Using credit cards for purchases is a convenience many consumers have come to expect, but not many customers or business owners actually know how credit card processing works. The process is complicated, involving industry lingo that may be unfamiliar to some, the coordination of multiple participants and the acquisition of a card-reading device. Much of the process happens behind the scenes, however. And while it’s useful to understand the entire process and the key players in it, many business owners will find that the most important aspects to understand are the hardware and software needed for credit card processing and the fees involved. 

What is credit card processing?

Several moving parts are involved in processing a credit card transaction. On one side of the transaction, you have the customer and the bank that issued their credit card. On the other side, you have the merchant and the bank that will receive the payment. Details about the transaction travel between the two banks through a credit card network, and the payment processor helps make sure things run smoothly.

Key participants in credit card processing

A good first step in understanding the process is to review industry terms for the key participants:

• Cardholder. A cardholder is the customer, or consumer, who is using the card for payment. The cardholder could be either the owner of the card or an authorized user.
• Issuing bank. An issuing bank is the entity that issued the credit card to the cardholder and is responsible for authorizing the transaction. If a transaction is approved, the issuing bank sends funds to the merchant bank, which in turn bills the card owner through a monthly credit card statement.
• Merchant. A merchant is a business that accepts credit card payments from customers for its goods or services. These include in-person, online or phone payments.
• Merchant bank. A merchant bank, also known as an acquiring bank, maintains the merchant account where the funds from credit card transactions are deposited. Some merchant banks act as payment processors in the card transaction. Others rely on third-party payment processors to manage the payment details.
• Payment processors. A payment processor, or merchant services company, helps manage the transaction process with the merchants, banks and card networks. In addition to helping authorize transactions and ensuring the transfer of funds, some payment processors also offer the hardware and software required to accept card transactions.
• Card networks. Credit card networks such as Visa, Mastercard, American Express and Discover are responsible for the infrastructure that allows the transmission of credit card details between the merchant bank and the issuing bank. Credit card networks have rules for the use of their networks and set interchange fees for their services.

How does credit card processing work?

Credit card processing happens in two steps: authorization and settlement. Although the authorization step — when a card is approved or declined — generally takes only a few seconds, the settlement stage is just as important to the merchant receiving its money.

Authorization

The cardholder starts the process by providing their card information through the merchant’s card-reading device. The card information is then sent to the merchant bank or the payment processor, which, in turn, routes the information through the appropriate card network to the issuing bank. After the issuing bank confirms the card details and checks the cardholder’s account status and available credit, it sends an approval or denial to the merchant bank. The merchant bank or payment processor then forwards the decision to the merchant’s card reader.

Settlement

In the settlement process, funds are moved from the issuing bank to the merchant account. Generally, merchants send batches of authorized credit card transactions to their merchant bank or payment processor at the close of business or another scheduled time. These transactions are routed to the card networks, which work with the issuing banks and merchant banks to ensure funds are deposited into the appropriate merchant account. The issuing bank deducts interchange fees from the transaction amounts before transferring the funds to the merchant account. As a general rule, it takes one to three business days for the settlement process to be completed. Source

How Businesses Can Go Mobile and Increase Sales

The evolution of modern markets and customer expectations have changed the conventional business payments model entirely. In today’s environment, it is now the norm to see a credit card processing terminal at every other vendor. Further, as customers become more engaged with an ever-increasing number of online and mobile options, doorstep delivery for all kinds of products and services is becoming a commonplace preference. But while offering credit card merchant services only needs some simple changes at your end, offering doorstep delivery can be a bit more complicated. Traditional methods make it challenging to gather and process payment information outside of your existing business and Point-of-Sale systems. However, thanks to modern integrated payment platform services, you can now expand your options to meet today’s customer expectations. By turning to cloud-connected mobile payments you can easily take payments right at their doorstep.

Today, modern credit card payment vendors have added new ways to help you process your payments efficiently. In addition to traditional on-site payment methods, these integrated payment platform services now offer ways for business owners to use modern devices such as Apple or Android smartphones to accept in-person or online payments. This way, your employees or delivery services no longer have to depend upon traditional equipment for payment processing. All they need is their phone, with your payment processor app and business’ information. Any payments that they accept are instantly transferred to your merchant account, all without going into the hands of a third party.

As a result, you can deliver your services anywhere you want, anytime you want. Do you deal with retail products or food delivery? Home improvement services or consultancy? Regardless of the type of business, this method of credit card processing can help you scale it right according to your expectations.

How Mobile Payment Processing Help You Increase Sales;

The super-easy way of processing payments at the doorstep is a significant factor in attracting customers to your business. But there’s more to it than meets the eye.

It Offers Clients Peace of Mind

If you offer mobile merchant services as a prominent factor in your solution, you become more approachable and accessible. Customers will ultimately feel more comfortable contacting you for product or service delivery. It’s because they know that they have the option to make the payment right at their doorstep, after the delivery of their services. This aspect is in contrast to having to pay upfront and risk failure of getting the product and service.

It Promises Additional Security

These integrated payment platform solutions are designed with new security measures. Even being mobile, these payment processing methods are payment card industry (PCI) data security standard (DSS) compliant. And it protects businesses and their customers against the risks that come with taking their personal and financial information for the payment.

It Encourages Repeat Business

These credit card processing features come together to make your business the go-to choice for your target market. As a result, you can create repeat customers out of what would otherwise be one-time patrons. This also goes a long way in helping you increase your long-term sales and enables you to scale your business efficiently.

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