How Credit Card System Works

A user is issued a credit card after an account has been approved by the credit provider (often a general bank, but sometimes a captive bank created to issue a particular brand of credit card, such as Wells Fargo or American Express Centurion Bank), with which the user will be able to make purchases from merchants accepting that credit card up to a pre-established credit limit.
When a purchase is made, the credit card user agrees to pay the card issuer. Originally the user would indicate their consent to pay, by signing a receipt with a record of the card details and indicating the amount to be paid, but many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet.

Electronic verification systems allow merchants (using a strip of magnetized material on the card holding information in a similar manner to magnetic tape or a floppy disk) to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase. Other variations of verification systems are used by eCommerce merchants to determine if the user's account is valid and able to accept the charge.

Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed. After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect. Otherwise, the cardholder must pay a defined minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the entire amount owed. The credit provider charges interest on the amount owed (typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for automatic payments to be deducted from the user's accounts.
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.

For example, if a user had a $1,000 outstanding balance and pays it in full, there would be no interest charged. If, however, even $1.00 of the total balance remained unpaid, interest would be charged on the full $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement.

The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, either to encourage balance transfers from cards of other issuers, or to encourage more spending on the part of the customer. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument. As the rates and terms vary, services have been set up allowing users to calculate savings available by switching cards, which can be considerable if there is a large outstanding balance.
Because of intense competition in the credit card industry, credit providers often offer incentives such as frequent flier points, gift certificates, or cash back (typically up to 1 percent based on total purchases) to try to attract customers to their program.

Low interest credit cards or even 0% interest credit cards are available. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. However, services are available which alert credit card holders when their low interest period is due to expire. Most such services charge a monthly or annual fee.

Credit Card

A credit card system is a type of retail transaction settlement and credit system, named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user's account after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the user). It is also different from a charge card (though this name is sometimes used by the public to describe credit cards), which requires the balance to be paid in full each month. In contrast, a credit card allows the consumer to 'revolve' their balance, at the cost of having interest charged. Most credit cards are the same shape and size, as specified by the ISO 7810 standard.

Process of Payday Loan

The loan is typically given in cash and secured by the borrower's post-dated check that includes the original loan principal and accrued interest. The maturity date usually coincides with the borrower's next payday. On the maturity date the lender processes the check traditionally or through electronic withdrawal from the borrower's checking account if the borrower does not first repay or service the loan in person.

Payday lenders typically operate small stores or franchises, but large financial service providers also offer variations on the payday advance. Some mainstream banks offer a "direct deposit advance" for customers whose paychecks are deposited electronically. When a consumer requests the direct deposit advance they receive a predetermined, small cash advance. On the next direct deposit into the consumer's bank account that advance amount is removed by the bank plus a fee for the advance (usually around 10-20%). Income tax preparation firms including H&R Block partner with lenders to offer "refund anticipation loans" to filers.
In the United States, most states have usury laws which forbid interest rates in excess of a certain APR. Payday lenders operate in those states by funding loans through a bank chartered in a different state. Under the legal doctrine of rate exportation, established by Marquette Nat. Bank v. First of Omaha Corp. 439 U.S. 299 (1978), the loan is governed by the laws of the state the bank is chartered in. This is the same doctrine that allows credit card issuers based in South Dakota and Delaware — states that abolished their usury laws — to offer credit cards nationwide.

Payday Loan

A payday loan or paycheck advance is a small, short-term loan (typically up to $1,500 in the U.S.) that is intended to bridge the borrower's cashflow gap between paydays. Payday loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card.

Process of Title Loan

Car title loan typically have annual interest rates above 100% and require repayment within the first month. These loans are made for much less than the true value of the car. Title loans are typically given without regard to borrowers' ability to repay or credit history. Because the loans are structured to be repaid in a single balloon payment after a very short term, borrowers frequently cannot pay the full amount due on the maturity date and instead find themselves extending or "rolling over" the loan repeatedly. In this way, many borrowers pay fees well in excess of the amount they originally borrowed. If the borrower fails to keep up with these recurring payments, the lender may summarily repossess the car, often stripping borrowers of their most valuable possession and only means of transportation and method of getting to work.

Title Loan

A car title loan or simply a title loan is a high interest loan where the borrower uses their automobile as collateral for the loan.

These high risk sub-prime loans are considered riskier for consumers than payday loans because the borrower puts their car at risk to secure the loan. In many cases they have to leave their car with the lending institution in order to receive the loan funds. As in all high risk lending, title loans can help a person in dire need in some circumstances. In many other cases the person would be better off to sell their car instead of taking out a loan.

Equity Loan

An equity loan is a mortgage placed on real estate in exchange for cash to the borrower. For example, if a person owns a home worth $100,000, but does not currently have a lien on it, they may take an equity loan at 80% loan to value (LTV) or $80,000 in cash in exchange for a lien on title placed by the lender of the equity loan.

Many lending institutions require the borrower to repay only an interest component of the loan each month (calculated daily, and compounded to the loan once each month). The borrower can apply any surplus funds to the outstanding loan principal at any time, reducing the amount of interest calculated from that day onwards. Some loan products also allow the possibility to redraw cash up to the original LTV, potentially perpetuating the life of the loan beyond the original loan term.

The rate of interest applied to equity loans is much lower than that applied to unsecured loans, such as credit card debt.