How do Visa, MasterCard and American Express Credit Cards Work?


Credit cards are widely used due to the convenience they offer to buy things without carrying cash everywhere you go. Anybody above the age of 18 or having an account with a bank can be issued a credit card. Users are issued the credit limit based on parameters like income, age, qualifications etc. Along with issuing cards banks also offer attractive offers, payback points and discounts on select purchases.

How does the transaction take place?

When the merchant swipes your credit card at the point of sale (POS) system your data is verified with the bank using an electronic verification system. There exists a communication link between POS and the Bank’s credit card department. Companies like Visa and MasterCard do not issue cards, they only provide the payment network for the numerous credit transactions carried out by merchants which connects them to banks. They process transactions between point of purchase and banks through which they make money. For a transaction to be completed your details like validity of the card and availability of sufficient balance on your card for payment are verified.  Many card issuers impose a limit on the amount that can be spent on a single transaction or on a day. If you have defaulted on earlier payments or exceeded credit limit then the merchant will be notified and the transaction will not be completed.

On successful transaction, the merchant’s bank blocks the credit amount which would be later reimbursed to the merchant. The merchant then submits the signed copies of your transaction slips to his bank for reimbursement. The credit card association and merchant bank deducts the fee for services provided to the merchant before reimbursing his money.

The card user has to pay the credit card issuer the amount due for the purchases made every month. In some cases he is also given an option to pay a minimum amount and pay the rest later, but an interest is charged on the balance due.

What is the difference -Visa /MasterCard or American Express?

Most merchants accept either of the credit cards. Some factors to compare are interest rate and annual fee. Along with Banks, credit card companies could also offer perks. Though there is only a little difference between Visa and MasterCard, Visa is accepted by a slightly higher number of merchants whereas MasterCard is accepted in more number of countries. Visa offers higher security of transaction for online purchases with additional password verification.

Unlike Visa and MasterCard who do not issue cards to the user, American express issues its own cards, verifies purchases and settles the due amount with both the customer and the merchant. American Express (Amex) generally charges merchants a higher fee which could be the reason of its lesser reach than Visa and MasterCard. Also the merchant is paid by Visa and MasterCard as soon as payment is realized but Amex reimburses the merchant after an agreed period like 30 days, hence these cards are not popular with small merchants.

From the users point of view, Amex sets its own interest rate, annual fee and payment schedule, hence there are limited choices available compared to the numerous options provided by banks which offer Visa or MasterCard. Premium members of Amex get complimentary airport clubs, $200 airline credit, discounts for companions and priority boarding.

To choose from one of them you need to compare interest rates, perks and acceptance to decide which fits your requirements the best.

Category: Business 576 1

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