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How Do Credit Cards Work?
How do credit cards work exactly? Well, let's begin with the basics:
technology makes credit cards work. A thin plastic card, usually 3-1/8
inches by 2-1/8 inches in size, contains identification information such
as a signature or picture, and it authorizes the person named on that
credit card to charge purchases or services to his or her account --
charges for which that person will be billed periodically.
Today, what really makes the credit card work harder than ever is the fact
that the information on the card is read by
automated teller machines (ATMs), store readers, and bank and Internet
computers.
How Long Have Credit Cards Been Used?
We have had credit cards working for us in the U.S. since the 1920s, when
individual companies, such as hotel chains and
oil companies, began issuing them to customers for purchases made at their
businesses. This use increased significantly
after World War II.
The first universal credit card worked a little differently than those
earlier ones -- it could be used at a variety of stores and businesses. It
was introduced by Diners' Club, Inc., in 1950. With this system, the
credit card company charged card holders an annual fee and billed them on
a monthly or yearly basis. Another major universal card -- the one with
the famous TV commercial ("Don't leave home without it!") -- was
established in 1958 by the American Express Co.
Later came the bank credit card works, or system. Under this plan, the
bank credits the account of the merchant as sales slips are received (this
meant merchants were paid quickly --something they loved) and assembles
charges to be billed to the credit card holder at the end of the billing
period. The credit card works for the issuer when the card holder pays the
bank either the entire balance or in monthly installments with interest
(sometimes called carrying charges).
The first national bank plan was BankAmericard, which was started on a
statewide basis in 1959 by the Bank of America in California. This system
was licensed in other states starting in 1966 and renamed Visa in 1976.
Most other major bank credit cards work in a similar way. Those early
credit cards were soon followed by MasterCard, formerly Master Charge. In
order to offer expanded services, such as meals and lodging, many smaller
banks that earlier offered credit cards on a local or regional basis
formed relationships with large national or international banks.
What Do the Numbers on My Credit Card Mean?
Credit cards work thanks to computers and special numbering systems.
Although phone, gas and department stores have their own numbering
systems, ANSI Standard X4.13-1983 is the system used by most national
credit card systems. Here are what some of the numbers mean and how they
make credit cards work so efficiently:
1.) The first digit in your credit card number signifies the system --
3=travel/entertainment cards (such as American Express and Diners' Club),
4=Visa, 5=MasterCard and 6=Discover Card.
2.) The structure of the credit card number varies by system. For example,
American Express card numbers start with 37; Carte Blanche and Diners Club
with 38.
3.) American Express: Digits 3-4 are type and currency, digits 5-11 are
the account number, digits 12-14 are the card number within the account,
and digit 15 is a check digit.
4.) Visa: Digits 2-6 are the bank number, digits 7-12 or 7-15 are the
account number, and digit 13 or 16 is a check digit.
5.) MasterCard: digits 2-3, 2-4, 2-5 or 2-6 are the bank number (depending
on whether digit 2 is a 1, 2, 3 or other). The digits after the bank
number up through digit 15 are the account number, and digit 16 is a check
digit.
6.) So now you know a little bit more about how credit cards work. To
learn more, check our list of other articles.
Credit Reports: What Information Providers Need to Know The Fair Credit
Reporting Act (FCRA) is designed to protect the privacy of credit report
information and to guarantee that information supplied by consumer
reporting agencies (CRAs) is as accurate as possible. If you provide
information to a CRA, such as a credit bureau, be aware that amendments to
the law spell out new legal obligations. These amendments were effective
September 30, 1997.
FCRA
Federal Trade Commission Home
FCRA
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