How credit cards work
This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.
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.
Want to learn more about credit cards from TPG? Sign up for our daily newsletter.
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.
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 photo by Getty Images
Welcome to The Points Guy!
Earn 50,000 bonus miles and 5,000 Medallion® Qualification Miles (MQMs) after you spend $2,000 in purchases on your new card in the first three months of card membership. Plus, earn up to $100 back in statement credits for eligible purchases at U.S. restaurants in the first three months of card membership.
With Status Boost™, earn 10,000 Medallion Qualification Miles (MQMs) after you spend $25,000 in purchases on your Card in a calendar year, up to two times per year getting you closer to Medallion Status. Earn 3X Miles on Delta purchases and purchases made directly with hotels, 2X Miles at restaurants and at U.S. supermarkets and earn 1X Mile on all other eligible purchases. Terms Apply.
- Earn 50,000 Bonus Miles and 5,000 Medallion® Qualification Miles (MQMs) after you spend $2,000 in purchases on your new Card in your first 3 months.
- Plus, earn up to $100 back in statement credits for eligible purchases at U.S. restaurants with your card within the first 3 months of membership.
- Earn up to 20,000 Medallion® Qualification Miles (MQMs) with Status Boost® per year. After you spend $25,000 in purchases on your Card in a calendar year, you can earn 10,000 MQMs two times per year, getting you closer to Medallion® Status. MQMs are used to determine Medallion® Status and are different than miles you earn toward flights.
- Earn 3X Miles on Delta purchases and purchases made directly with hotels.
- Earn 2X Miles at restaurants worldwide, including takeout and delivery and at U.S. supermarkets.
- Earn 1X Miles on all other eligible purchases.
- Receive a Domestic Main Cabin round-trip companion certificate each year upon renewal of your Card. *Payment of the government imposed taxes and fees of no more than $75 for roundtrip domestic flights (for itineraries with up to four flight segments) is required. Baggage charges and other restrictions apply. See terms and conditions for details.
- Enjoy your first checked bag free on Delta flights.
- Fee Credit for Global Entry or TSA Pre✓®.
- Enjoy an exclusive rate of $39 per person per visit to enter the Delta Sky Club® for you and up to two guests when traveling on a Delta flight.
- No Foreign Transaction Fees.
- $250 Annual Fee.
- Terms Apply.
- See Rates & Fees