Anatomy of a Credit Card Transaction

Anatomy of a Credit Card Transaction
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Understanding the anatomy of credit card transactions helps you maintain the proper perspective on credit card usage and develop a healthy credit history. Credit cards enable purchasers to instantaneously borrow money against an account, which the consumer fully or partially repays each month. According to Sallie Mae, an education-focused financial services company, thirty percent of undergraduate students have a credit card.


When using a credit card to purchase goods or services, there are more parties involved than just the cardholder and the merchant. The credit card company, such as MasterCard or Visa, is a party to the transaction and is known as the card association. Financial institutions also play a role in completing credit card transactions. The merchant's bank is called the acquiring bank, and the consumer's bank is called the issuing bank. Finally, the transaction network links all parties together and completes the transaction electronically in seconds.


The anatomy of a credit card transaction begins with authorization. You, the consumer, use your credit card to make a purchase from the merchant. Your purchase information is sent electronically to the merchant's bank. The merchant's bank requests authorization from the credit card company to proceed with the sale. Prior to granting authorization, the credit card company checks with the issuing bank to make sure your account is in good standing. When authorization is given, your purchase can be made.

Batching, Clearing and Funding

The anatomy of a credit card transaction continues with batching, clearing and funding. The merchant stores the day's purchases in a batch. At the end of the day, the merchant sends the batch to the acquiring bank for payment. The acquiring bank sends a request for payment to through the card association, which sends a request for payment to the issuing bank. Once cleared for payment, the issuing bank sends payment through the card association to the acquiring bank, which sends payment to the merchant. This circle of requesting and paying is called funding. Fees for services are removed throughout the process. However, these fees do not affect the consumer.

Costs and Benefits

To avoid paying unwanted fees as a part of your credit card usage, do your homework and be prepared. First, shop around for a credit card that fulfills your needs. For example, apply for a rewards card if you are fairly certain you will be able to pay off your monthly debt each month. Apply for a credit card with a low introductory annual percentage rate if you're about to make a substantial, one-time purchase that may take a few months to pay off. Ask the credit card company about miscellaneous fees, including cash advance fees, annual fees, excess limit fees and card replacement fees. Also, be prepared to pay your bill on time to avoid late fees.