How Do Credit Card Transactions Work?
Credit card transactions might seem like they happen instantly, but there’s a lot going on behind the scenes. Here’s a breakdown of what happens when you use your credit card:
You Make A Purchase
You swipe, tap, insert or enter your credit card information at a purchase point or on a website. The merchant sends the payment request electronically.
The Payment Processor Receives The Request
The merchant’s payment processor sends the transaction information through the card network, such as Visa, Mastercard or American Express.
The Card Issuer Approves Or Declines The Transaction
At this point, the transaction will either go through or get declined. Your credit card issuer will check whether you have enough available credit and whether the transaction seems legitimate.
If fraud is suspected, the transaction may be denied, or you may need to go through an additional verification step. The transaction will generally be denied if you’ve used up your credit limit.
The Merchant Gets Paid
If the transaction is approved, the merchant gets paid and you’re good to go.
The Charge Appears On Your Account
Once a transaction is approved, it should appear on your credit card statement – perhaps first as a pending transaction and then as a posted transaction. At the end of your billing cycle, all of your credit card transactions are grouped into a monthly statement.
5 Ways To Build Credit Using A Credit Card
Credit cards can be used to build good credit, but they must be managed carefully since using them irresponsibly may drive your credit score down. When building credit, you’ll want to make on-time payments as well as the minimum payment that’s due for the credit card.
1. Apply For The Right Kind Of Credit Card
Look for a card with no annual fee that reports to the three major credit bureaus. Ideally, you won’t need a low interest rate because you’ll pay the card off monthly. Interest only comes into play if you carry a balance into the next month.
Those without a credit history or bad credit may need a secured credit card. These cards are secured with a deposit you pay, which is typically at least $200.
2. Become An Authorized User On A Credit Card
If you’re having trouble qualifying for your own credit card, you can become an authorized user on a friend or family member’s card. This allows you to make purchases on the card without being responsible for the payments – though you should pay your authorized user for charges you make on the card.
But this is only a good idea if you trust the cardholder to pay on time. Why? When the primary user of the card pays their bill each month, this payment will also be reflected on your credit report, boosting your score and theirs. On the flip side, if the cardholder misses payments or makes them late, it could hurt your credit.
3. Make On-Time Payments
Lenders want to know you’re capable of making timely payments, so the importance of making on-time payments cannot be understated. Missing payments will negatively impact your score, so when making purchases with a credit card, you should always know exactly when and how you’ll be able to make your next payment. Your payment history has the most significant impact on your credit score. Making on-time payments can help you build good credit, while late or missed payments can leave you with poor credit.
4. Pay Down Credit Card Balances
Going into debt can damage your credit, as how much you owe constitutes 30% of your credit score. That means using too much of your revolving credit can drive down your credit, but keeping your credit utilization ratio low can improve your credit score.
5. Ask For Higher Credit Limits
Another way to reduce your credit utilization ratio is by asking your lender to increase your credit limit. Even if you still owe the same amount, the percentage of your available credit that you’re currently using will be lower. However, just know that requesting a credit line increase can result in a hard inquiry and temporarily dent your credit score.
