Charging is paying for purchases by instantly borrowing the money that you spend on the purchase.

You pay later for whatever you bought by repaying the loan that you received when you made the purchase.

Part of what makes instant borrowing possible are the four major credit card networks: MasterCard, Visa, American Express, and Discover. Credit card networks facilitate transactions between merchants (where you use your credit card) and credit card issuers (the companies that loan you the money). In addition to aiding transactions, credit card networks determine where credit cards are accepted.

Credit card issuers provide cards and credit limits to consumers. Issuers also manage numerous features of credit cards: your application and approval, distributing cards, terms and benefits (such as annual fees and rewards), cardholder payments, and more. Card issuers also determine how much credit to extend to you and have the final approval on whether a credit card transaction you make is approved or denied.

Major credit card issuers include:

  • American Express (also a network)
  • Bank of America
  • Capital One
  • Chase
  • Citi
  • Discover (also a network)
  • U.S. Bank
  • Wells Fargo

How the Parts Work Together

Credit card networks and issuers work together to process the credit card purchase transactions that you make at merchants. Each merchant that accepts credit cards has a merchant account at what is known as an acquirer bank. The merchant’s acquirer account is what allows the merchant to accept credit card payments.

Purchases - Let’s say you have a Costco Anywhere Visa Card by Citi. When you use the card at Costco, there are four players involved in the payment process: you, Costco (merchant and acquirer), Visa (network) and Citi (issuer).

  1. You swipe, insert, or tap your card at checkout.
  2. Costco (through its acquirer function) sends the transaction to Visa.
  3. Visa identifies the issuer and sends the transaction to Citi.
  4. Citi reviews the transaction, approves or denies the transaction, and sends the decision back to Visa.
  5. Visa passes the decision to Costco (via its acquirer function), and you find out whether your transaction has been approved or denied.

This digital communication happens almost instantaneously. After approved transactions are completed, they are kept on file by the acquirer so that the transactions remain available to the merchant for making changes, such as adding a tip.

Processing - Normally after business hours, all stored credit card transactions for the day are processed by the merchant’s acquirer with the networks and issuers for the credit cards the merchant took that day. The merchant’s account is credited by the acquirer with the net amount of the day’s transactions. The acquirer, networks, and issuers settle money accounts, including assessing processing fees. Credit card transactions are added to consumer accounts by the issuers.

Statements - On (or before) a credit card statement closing day each month, the credit card issuer tabulates and sends the consumer an account statement. Each statement has a new balance amount (everything owed through the day before the statement closed) and a minimum payment amount. Payment is due on the next payment due date (the day in the month of which never varies).

  • If you pay the statement's new balance amount in full on or before the payment due day, no interest is charged.

  • If you pay any amount that is less than the statement's new balance on or before the payment due date, interest is charged on the new balance amount after the amount of the payment has been deducted.

Regardless of the payment amount, when a payment is made one or more days after the payment due date, both a late fee and interest on the entire statement's new balance amount are charged. Late fees and interest are added to a credit card account the same as any other transaction. They are included in the new balance amount on the following statement.

The Risks

Charging purchases with credit cards can be a nice convenience, but using credit cards involves risk. Avoiding the risk requires effort on your part that can more than offset the convenience.


It is very easy to charge more than you can afford to pay back, especially when you lose sight of the fact that credit cards are a source of debt instead of “free” money. Credit card debt can get out of control quickly with careless charging and failure to pay the monthly new balance in full each month. The exorbitant interest rates charged on credit cards contribute to a rapid increase in unpaid credit card balances.

Limiting and tracking credit card usage is how overspending, with the resulting credit card debt, can be avoided. Ways to do this include:

  • setting a limit on monthly charges that you can afford to pay in full;
  • keeping track of all credit card charges to stay within your charging limit;
  • paying the statement’s new balance in full every month.

Paying Interest

Credit card companies charge interest, at an exorbitant rate, on an account unpaid balance. The only way to avoid paying interest is to pay the statement's new balance in full every month.

The simple way to ensure that each statement is paid in full and on time is to set up automatic payments with the credit card company for the new balance amount.

Late Fees

Forgetting a credit card payment or making a payment after the due date will result in a late fee being added to the credit card balance. Late fees are handled the same as purchase transactions. They appear on the statement after which they are incurred and are included in the calculation of interest on an unpaid balance.

Missing and making late payments can also have a negative impact on your credit score.

As with interest, setting up automatic credit card payments for the statement's new balance will avoid late fees.


Credit cards are exceptionally vulnerable to being used without your knowledge. You do not have to pay for unauthorized use of your credit card as long as you identify the fraudulent charges and dispute those charges within 60 days after the date of the statement on which the bogus charges first appeared.

Protecting yourself from credit card theft requires that you pay attention to the details.

  1. Keep a record of all credit card charges that you make or authorize.
  2. Reconcile credit card statements each month shortly after receipt.
  3. Immediately dispute any fraudulent charges on a statement following the instructions printed on the back of the statement.

When a credit card company receives a dispute, they are required to investigate. While the investigation is being conducted, you are not required to pay the disputed charges nor can the credit card company charge interest on those charges. If the investigation shows the disputed charges are fraudulent, the charges are deleted from your account.

If you fail to dispute charges within 60 days after the date of the statement on which the bogus charges first appear, you are responsible for paying those charges.

Cash Advances

Many credit cards allow you to get cash within a specified limit. A cash advance can be taken at an automatic teller machine (ATM), through a bank withdrawal, or using cash advance convenience checks provided by the credit card issuer. An advance from a credit card is a short-term, expensive cash loan that must be paid back.

Cash advances show on credit card statements separate from purchase transactions. Cash advances, normally with an interest rate that is higher than the rate for purchases, are processed and reported separately. While interest is charged on purchase transactions only after a statement balance has not been paid in full, the interest on cash advances starts to accrue on the day the cash is dispensed.

Credit card payments are usually applied to a cash advance balance first because of the higher interest rate. This can result in an entire payment being totally applied to the cash balance with nothing applied to the purchase transaction balance. This can result in interest being charged unexpectedly for the entire purchase transaction balance.

The best strategy for getting cash advances from a credit card is not to, unless you have absolutely no other choice.

Staying On Top of Your Credit Cards

Income Companion simplifies the managing of credit card use by supporting a four-step approach to handling credit card activity. The consistent advantages of this four-step method are:

  • not paying any interest or fees;
  • avoiding having to pay fraudulent charges;
  • always knowing how your charging activity is affecting your finances.

The four steps, in summary, are:

  1. Always get/have some kind of receipt for charges and refunds that you authorize.

  2. When convenient, enter new activity in Income Companion. At the same time, schedule payments to fully pay for new charges. Doing so will show you immediately how your charging activity is affecting your Incredibly Cool Budget.

  3. Using the program, reconcile credit card statements against your receipts as soon as possible each month. Dispute any fraudulent charges that appear on a statement within 60 days of the statement date to avoid having to pay the bogus charges.

  4. Pay the statement’s new balance each month in full on or before the payment due date to avoid paying interest and late fees.

Statement Days

There is typically a twenty-five-day grace period between the day a credit card statement is issued and when the resulting payment is due. Payment days never vary; however, statement closing days could be sooner than the normal closing day. For example, a card closes on the 19th with a payment due the following month on the 15th. Each payment will always be due on the 15th, but statements could close on or several days before the 19th.

Being aware of the statement closing days on your credit cards can be useful for delaying when you will have to pay for purchases by as much as 30 days. For the card example in the previous paragraph, if you buy something just before the statement closes on or before the 19th, the purchase will be on your next statement. If you wait to make your purchase until on or shortly after the 19th, the transaction will not appear on the next statement, but will be delayed until the following statement. You will have an extra 30 days before having to pay for the item.


If a credit card offers you the opportunity to earn cash back, points, or miles on purchases, it’s a rewards card. Rewards cards either provide you with the same number of rewards of every purchase (known as flat-rate rewards) or offer bonus rewards on certain purchase categories (such as increased earning rates on dining out, gas, or groceries). You can only earn rewards on purchases, not on balance transfers (moving the balance on a credit card to another credit card) or cash advances.

Paying bills with a rewards credit card lets you earn card benefits by paying your bills. The downside of using credit cards to pay your bills, of course, is that you have to plan for and pay your statement’s new balance in full each month. If you can do that consistently, using rewards credit cards to make bill payments can be quite, well, rewarding.

Rewards credit card programs vary as to which rewards are earned, how the rewards are earned, and how the rewards can be redeemed. You will have to do your research to find a rewards credit card that best fits you.

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