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The Hidden World of Credit Cards
Chances are you’re among the 71% of Americans who carry one or more of the 1.5 billion credit cards in the U.S. While survey results vary, they all agree that most people don’t understand how credit cards work or how fees and interest are calculated, and an overwhelming majority don’t understand all the parts of a credit card.
By the Numbers
Virtually all national credit cards have one feature in common – the 16-digit number on the front of the card.
Contrary to what you might think, this is not your account number, though it’s in there along with some other helpful information. The numbering system was created by the American National Standards Institute to create consistency for vendors and processors.
If you’ve ever provided your credit card number over the phone and wondered why you weren’t asked about the type of card or who issued it, that’s because all that information is in the number.
The first digit determines what type of card you are using. For example:
3 – Travel and entertainment cards such as American Express, Carte Blanche, and Diners Club
4 – Visa
5 – MasterCard
6 – Discover
The rest of the numbers provide a wealth of information about who issued the card and who it belongs to. Digits 2-6 identify the issuing bank — Bank of America, Wells Fargo, etc. Numbers 7-15 are your account number and are unique, like your checking account number.
The final digit is called the check number or a checksum and is used by an algorithm (a type of mathematical formula) to determine if the number provided is valid.
A Number With Many Names
You’ve probably noticed that when you make a telephone or online purchase, you’re usually asked for the three-digit code on the back of your credit card or the four-digit code on the front of an American Express card. This security code goes by a variety of names:
CVD – Card Verification Data
CVN – Card Verification Number
CVV – Card Verification Value
These, along with their four-digit variants, are usually required when “card not present” transactions are completed and serve as additional validation on whether the credit card number has been stolen. Vendors (retailers, online merchants, and others) are not supposed to keep this number on file.
The stripe that runs the length of your card — the part that’s swiped through credit card machines — has been embedded with iron particles and magnetized so it can store information.
These stripes generally have three tracks of lines of information, though normally only two are used. The first two tracks are “read only,” which means that card readers such as an ATM or a credit card machine can read the information but can’t change it. Track three, when it is used, is often “read/write,” which means it can be altered in the course of a transaction and is sometimes used to store security information.
A popular myth about the stripe is that it contains all sorts of personal information about you, including your address and date of birth. It doesn’t. The stripe contains the same information that is visible on the card plus some additional security data and information such as a country code.
It’s a Loan
The simplest explanation for the way credit cards work is to think of them as little plastic bank loan officers who live in your wallet. Every time you make a purchase (up to your limit), the bank loans you the exact amount you need. Just like any other loan, the bank charges you interest.
Most credit cards offer a grace period on new purchases that is based on your billing date. Let’s say your billing date is the 15th of the month and you buy a new coat on the 17th. That purchase will be interest free until the 15th of the next month, or about 28 days. If you purchased that same coat on the 11th, it would begin to accumulate interest in just four days.
Interest Rates Vary
Not all credit cards charge the same interest rate, and this includes cards that are similarly branded, such as Visa or MasterCard. The interest rate each card charges is determined by the issuing bank. That means a Visa issued to John by Bank ABC may have a different interest rate than a Visa issued by Bank XYZ.
Different interest rates may apply to different types of transactions as well. Cash advances are usually charged a higher interest rate than purchases and may not be covered under the card’s grace-period rules.
The Fine Print
The Fair Credit Reporting Act has helped clear up the fine print of credit card agreements and contracts, making them more understandable for non-lawyers.
However, no matter how simple they are, they can’t be understood if they aren’t read. This is why the most important thing you can do when applying for a card, as well as with your existing cards, is to read the user agreement.
The user agreement spells out the interest rate you will be charged, how long that rate is guaranteed for, how interest is calculated, and other important information. Your rights and responsibilities are also highlighted in the agreement, which is why reading and understanding the information is so important.
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