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How Credit Cards Work

Credit cards are not all the same, of course, but there are enough similarities in how they work that it is worthwhile understanding this. I am talking here about the so-called major credit cards, such as Visa, MasterCard, and Discover, and not about more specialized cards such as those issued by department stores and oil companies.

When you make a credit card purchase, the merchant contacts the credit card company to verify that the card is valid and the amount of the purchase will be validated. This is almost always done automatically and very quickly by the electronic credit card readers, or swipers, that are in common use. If the charge is accepted, the amount of the purchase, less a transaction service fee, is credited to the merchant’s account and the full amount is debited from your card account. These merchant service fees, which can range from less than 1% to 5%, are one of the ways the credit card companies make their money.


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