Surprisingly few people seem to know how credit really works. As children, money was something we took for granted. Kids don’t know where money comes from, how hard it is to find, or that it can run out.
Unfortunately, many adults face the same ignorance regarding their cards. That’s how they end up with low credit scores and bad debt. They seem to buy things with no thought to interest rates, and no plan on how to pay their cards back.
Authorizing credit cards is one method banks use to remind customers of this fact. Basically, using a credit card is taking out a loan. You ‘borrow’ a money, use it to buy things, then pay it back – with interest – after a specified period. The amount of cash available on your card depends on factors such as your repayment history, income, and spending habits. These factors contribute to your credit score.
Types of credit checks
Credit card authorization checks for three main things. One, it confirms that you have enough money for the purchase. This could be the amount of money in your bank account, or your credit limit. Your credit limit is the maximum amount your card lets you spend on credit. If you are past your limit, your transaction will be blocked or reversed.
The second thing is whether your purchase is allowed. Some cards prevent certain ‘risky’ transactions like international purchases, or interactions on barred sites. The barred sites might include gambling, pornography, or other sites that are deemed to be unfavorable or fraudulent.
The third check is personal verification. This aims to be sure you are the legal owner of the card. It prevents identity theft and card fraud.
All three authorization products have similar steps. Authorization usually happens through the card payment processor. When a customer swipes a card or inputs their card details onto a website, it initiates this chain of events.
How credit cards are authorized
The website or electronic keypad sends a digital request to its payment processor, which then forwards it to the issuing bank (the bank that issued the credit card to the cardholder). The bank checks the customer’s account and, if all is well, it sends an approval message. If there’s a problem, the issuer sends a declined message and the card transaction fails.
If there’s no problem, the transaction goes through, the customer receives their purchase, and the cash reaches the merchant’s account in a few days.
As for customer verification, the customer can input personal identifying details, such as a PIN, signature, or security code. These are transmitted to the issuer, and once approved, the transaction is completed. Good processors use encryption and security protocols to approve transactions instantly and safely.
For more information on how credit card authorization works, or to sign up for a merchant account, please call (888) 924-2743 or go to Charge.com.