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How credit cards work

Sept. 13, 2020
4 min read
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Editor’s note: This post has been updated with the latest information.

You've probably already used one of your credit cards today. After you finish reading this article, there is a decent chance that you'll use it again.

And despite the ongoing COVID-19 pandemic and record unemployment, the average amount of individual debt has consistently declined since the onset of the pandemic. Average credit scores are increasing at a higher rate than during this same period last year, and credit utilization — how much available revolving credit a consumer is using — is at a record low for the past five months, according to Experian data from July 2020.

Credit cards still offer a convenient, simple and rewarding alternative to handing over dollar bills, but there is a lot happening from the time you swipe your card to the time a transaction is approved. If you've ever wondered about the information flow while waiting to see the "approved" message, here's a look behind the scenes.

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Authorizing your purchase

When you insert your card or input your number online, it initiates a volley of information between a number of parties. “There’s a lot of stuff that you can’t see,” said Mark Nelsen, senior vice president of risk products and business intelligence at Visa. “Behind the scenes, there is so much happening. Whether you’re using contactless payments or inserting a chip card, there is a whole suite of cryptography happening to tell the merchant that the card is authentic."

In addition to making sure that the card is authentic, it's also making sure that you have enough available credit to cover the charge. The first stop on the journey relies on a payment processor. For example, PayPal is a processor. The processor passes your information to the network of the card issuer such as Visa, Discover, MasterCard or American Express.

The issuer sends the information to the bank that gave you the card. At that point, your personal finances play a role in determining whether the purchase is approved. If your card is maxed out, your card is declined. This is also where the bank's algorithm might flag suspicious activity that indicates the card may be stolen. If all seems well, the bank gives the go-ahead for the transaction. The approval or denial message travels on the same return path, passing through the card issuer's network, the processor, and finally, back to the merchant who lets you leave the store with your goods or sends you a confirmation email that your products are on the way to your door.

Related: 7 reasons why your credit card may have been declined

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Photo by @Lesia.Valentain/Twenty20
(Photo by @Lesia.Valentain/Twenty20)

Powering faster processing times

When you recognize all the back-and-forth communication that must occur, credit card processing seems very quick. However, we live in the age of instant gratification, and every second of delay can frustrate some shoppers.

To speed things up even more, Visa has its Quick Chip for EMV technology, while MasterCard uses M/Chip Fast. Both are designed to make credit card transactions even faster. For in-person transactions, Nelsen predicts that we'll see those times continue to decrease. "The processing time is largely based on the logic in the payment terminal, which is determined by what the merchant wants to do with the data," Nelsen said. "Merchants will continue to optimize that software logic to make it as fast as they can."

Making the final settlement

No matter how quickly you receive approval, though, there is still work left to do. The funds still need to make their way to the merchant. That's why your online credit card account has "Pending" next to your most recent transactions. In addition to transmitting the money, the amount may change. For example, a restaurant bill is approved for the base price without the tip. The restaurant has to add that gratuity into the final amount.

The settlement process operates in a similar manner to the initial authorization. The merchant sends the processor its transaction information, which is passed along to the issuer and the bank, and the funds make their way into the merchant's bank account. Now, you officially owe your bank for the purchase. But hopefully, they owe you some meaningful reward points, too.

Featured image by Getty Images/iStockphoto

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How we chose these cards

Our points-obsessed staff uses a plethora of credit cards on a daily basis. If anyone on our team wouldn’t recommend it to a friend or a family member, we wouldn’t recommend it on The Points Guy either. Our opinions are our own, and have not been reviewed, approved, or endorsed by our advertising partners.
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TPG featured card

Best card for premium perks while traveling
TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
Go to review

Rewards

2 - 10X points
10XEarn unlimited 10X miles on hotels and rental cars booked through Capital One Travel
5X5X miles on flights booked through Capital One Travel.
2X2 Miles per dollar on every purchase, every day

Intro offer

75,000 bonus miles
Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel

Annual Fee

$395

Recommended Credit

740-850
Excellent
Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

Why We Chose It

The Capital One Venture X card is one of the best all-round travel credit cards ever launched. Not only is it offering a tremendous welcome bonus, but cardholders can earn tons of miles on everyday spending and receive a 10,000-mile anniversary bonus to boot. Its annual fee is $395, but cardholders can count on up to $300 in statement credits toward travel booked through Capital One Travel each year and other valuable benefits like access to Priority Pass lounges and Capital One’s own growing family of airport lounges.

Pros

  • Excellent welcome offer worth 75,000 miles after you spend $4,000 on purchases in the first three months.
  • Up to $300 in annual travel statement credits toward bookings make through Capital One Travel.
  • 10,000 bonus miles (worth $100 toward travel) each account anniversary.

Cons

  • The $395 annual fee might be expensive for some, but this card’s benefits provide much more value than that.
  • If you don’t travel frequently, this might not be the best card for you.
  • Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel
  • Receive up to $300 back annually as statement credits for bookings through Capital One Travel, where you'll get Capital One's best prices on thousands of options
  • Get 10,000 bonus miles (equal to $100 towards travel) every year, starting on your first anniversary
  • Earn unlimited 10X miles on hotels and rental cars booked through Capital One Travel and 5X miles on flights booked through Capital One Travel
  • Earn unlimited 2X miles on all other purchases
  • Unlimited complimentary access for you and two guests to 1,400+ lounges, including Capital One Lounges and our Partner Lounge Network
  • Receive up to a $100 credit for Global Entry or TSA PreCheck®
  • Use your Venture X miles to easily cover travel expenses, including flights, hotels, rental cars and more—you can even transfer your miles to your choice of 15+ travel loyalty programs
  • Named editors' choice for "Best New Credit Card of 2021" by The Points Guy
  • Earn 10 miles per dollar when you book on Turo, the world's largest car sharing marketplace, through May 16, 2023
Best card for premium perks while traveling
TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
Go to review

Rewards Rate

10XEarn unlimited 10X miles on hotels and rental cars booked through Capital One Travel
5X5X miles on flights booked through Capital One Travel.
2X2 Miles per dollar on every purchase, every day
  • Intro Offer
    Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel

    75,000 bonus miles
  • Annual Fee

    $395
  • Recommended Credit
    Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

    740-850
    Excellent

Why We Chose It

The Capital One Venture X card is one of the best all-round travel credit cards ever launched. Not only is it offering a tremendous welcome bonus, but cardholders can earn tons of miles on everyday spending and receive a 10,000-mile anniversary bonus to boot. Its annual fee is $395, but cardholders can count on up to $300 in statement credits toward travel booked through Capital One Travel each year and other valuable benefits like access to Priority Pass lounges and Capital One’s own growing family of airport lounges.

Pros

  • Excellent welcome offer worth 75,000 miles after you spend $4,000 on purchases in the first three months.
  • Up to $300 in annual travel statement credits toward bookings make through Capital One Travel.
  • 10,000 bonus miles (worth $100 toward travel) each account anniversary.

Cons

  • The $395 annual fee might be expensive for some, but this card’s benefits provide much more value than that.
  • If you don’t travel frequently, this might not be the best card for you.
  • Earn 75,000 bonus miles when you spend $4,000 on purchases in the first 3 months from account opening, equal to $750 in travel
  • Receive up to $300 back annually as statement credits for bookings through Capital One Travel, where you'll get Capital One's best prices on thousands of options
  • Get 10,000 bonus miles (equal to $100 towards travel) every year, starting on your first anniversary
  • Earn unlimited 10X miles on hotels and rental cars booked through Capital One Travel and 5X miles on flights booked through Capital One Travel
  • Earn unlimited 2X miles on all other purchases
  • Unlimited complimentary access for you and two guests to 1,400+ lounges, including Capital One Lounges and our Partner Lounge Network
  • Receive up to a $100 credit for Global Entry or TSA PreCheck®
  • Use your Venture X miles to easily cover travel expenses, including flights, hotels, rental cars and more—you can even transfer your miles to your choice of 15+ travel loyalty programs
  • Named editors' choice for "Best New Credit Card of 2021" by The Points Guy
  • Earn 10 miles per dollar when you book on Turo, the world's largest car sharing marketplace, through May 16, 2023