End to end: How does a credit card work?

August 26, 2020
Woman using a credit card at a cash register

We’ve gotten tons of questions from our community about how credit cards work. In this article, we lay out what goes on behind the scenes when you apply for, swipe, and pay your bill on your credit card.
Here are a few characters you need to know before we begin:

The Cardholder: That’s you! The person who is doing the applying, swiping, and bill paying.

• The Issuer: The issuer manages the application process, sends you your card, and communicates directly with you. This is who you call if you have an issue with your credit card.

The Issuing Bank: The issuer partners with an issuing bank to determine your credit limit and APR and lend you the money that you use as credit each month. They’re also on the hook if you don’t repay. Likely in your experience, the issuer and issuing bank are the same (ex. Chase, Bank of America).

• The Network: The card network that connects the merchant with the financial institution that issued the card to process and approve credit card transactions. (Examples: Visa or Mastercard)

The Merchant: Any company that accepts your credit card as payment for goods or services.

• The Acquiring Bank: The bank that maintains the merchant accounts and allows them to accept transactions via credit cards.

• The Credit Bureau: The credit bureau collects individual’s credit information to ensure that creditors have the information they need to make lending decisions. (Ex. Equifax, Transunion, and Experian)

Applying for a Credit Card

You’ve done your research and found a credit card that fits your lifestyle. You have stable enough income to live within your means, and a solid credit score. Perhaps you have filled out a pre-qualification application, which can help you figure out what credit cards you are more likely to be approved for. What does the credit application process look like?

  1. You fill out an application from an issuer, which includes personally identifiable information, like your SSN.

  2. The issuer does a “hard pull” on your credit, using your SSN to request your credit score from one of the three credit bureaus — Transunion, Experian, or Equifax.

  3. Depending on your credit score, debt-to-income ratio, and proprietary risk scoring factors, the issuer either denies you and sends you a rejection letter, or approves you and determines your APR (Annual Percentage Rate) and credit limit.

Swiping a Credit Card

You’re buying one of your favorite products online. You whip out your credit card and fill in all of the payment information and submit your order. Ever wonder what goes on behind the scenes?

  1. When you swipe your card or submit your credit card details via the web, the merchant’s portal recognizes your card information as belonging to either the Visa, Mastercard, Discover, or American Express network.
  2. The network collects your card’s details and sends them to the issuer.
  3. The issuer approves the purchase if you have a sufficient enough credit line, and let’s the acquiring bank know by sending a message through the network.
  4. The acquiring bank sends an electronic transfer of funds to the merchant, and awaits a transfer of funds from the issuing bank.
  5. Within 24–36 hours, the transaction is complete. The purchase will show up at the end of the month on your credit card statement.

Paying Your Credit Card Bill

Your credit card statement arrives in your email. What comes next?

Your credit card statement arrives and tells you both your statement balance and the minimum payment due. You have some choices. You can:

  1. Pay your statement balance in full. If you do this, you will not pay any additional interest and your card issuer reports an on-time payment to the credit bureaus, which may increase your credit score. We always recommend this option, when possible.

  2. Pay your statement balance in part. If for some reason you are unable to pay your statement balance in full, the second best option is paying your statement balance in part. Given borrowing on a credit card can be expensive based on interest rates, always try to pay as much of the statement balance as possible.

  3. Pay at least the minimum payment. While paying the minimum means an on-time payment to your card issuer, which may increase your credit score, you begin accruing interest on the remaining balance every day that it goes unpaid which can cost you tons of money in credit card interest. Additionally, your credit utilization will be higher than if you pay your balance in full, which can decrease your credit score.

  4. Not pay at all. If you don’t make the minimum payment on time, your card may be deactivated and declined. Additionally, you will begin accruing interest on your entire balance every day and the credit card reports that you missed an on-time payment to the credit bureau. This may hurt your credit score.

Curious to learn more? Here are a few interesting videos about credit cards as whole:

How credit cards were invented

Who really pays for credit card rewards

Disclaimer: A friendly and earnest reminder that content in the Sequin Project is not intended to be financial advice, and that the writers at Sequin are not certified financial advisors. If you’re looking to make any decisions related to the content above, please contact a certified financial advisor first.

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Co-Founder & CEO of Sequin

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Increase in credit score is dependent on on-time payment behavior and not guaranteed. Credit score is impacted by many factors and a Stilt loan is one of them. Stilt reports credit to Equifax, Transunion and Experian.

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