Credit cards serve as valuable resources for a range of purposes. They help streamline your finances, control your monthly expenditure, and facilitate specific requirements like booking hotels or renting cars. In essence, credit cards are indispensable for your everyday transactions and for building your credit score. The good news is that advancements in credit card technology are continuously enhancing their safety and convenience for users.

The power of technology has brought about impressive changes over the years, and credit card technology is no different. You might find that some aspects of modern credit card technology are pretty impressive for helping prevent fraud and protect your financial and personal information. The better you understand the process, the easier it is to see how credit card technology works to improve the entire process of using credit cards for consumers like you. Here's what you need to know.

How Credit Cards Work

Credit cards are thin bits of plastic you keep in your wallet and use instead of cash to conduct various transactions. Most brick-and-mortar and online vendors accept credit cards as payment for goods or services provided. That means that the card acts as cash to purchase things. However, the process by which this occurs is quite complex, even though the entire transaction occurs in a matter of seconds.

For "in person" or "card present" transactions, meaning the physical credit card is present and used for the transaction, you will either insert the chip end of your credit card into a chip reader or swipe the card's magnetic strip to initiate the transaction. The device then reads the information on the chip or the magnetic strip and then approves or declines the transaction. The process takes seconds, but a lot occurs within that time. Here's what you need to know.

Credit Card Networks

Credit card transaction approvals (or otherwise) do not occur within a vacuum. Once a reader obtains your card information, it gets transmitted to the credit card companies for approval. That occurs through credit card networks that exist to facilitate or process credit card transactions. Each major credit card company has a network. Currently, there are four credit card networks for U.S. consumers.

• MasterCard
• Visa
• Discover
• American Express

These networks supply and maintain the infrastructure that makes credit card transactions through their networks possible. The credit card issuer is the individual banking institution that provides the credit card.

Transaction Process

The transaction process for using credit cards involves three distinct stages:

• Authorization
• Authentication
• Clearing and settlement

Each stage occurs almost instantaneously once you initiate the transaction. The process involves:

• The consumer making the purchase.
• The vendor or merchant, selling goods or providing services.
• The credit card network.
• The merchant's bank.
• The issuing bank holding the credit card account.

Credit Card Authorization & Authentication

Here's how the authorization and authentication processes work when you use your credit card.

• Credit card information is input (swipe, insertion, or entered online).
• The merchant sends credit card details via the card network, which requests payment authorization from the issuing bank.
• The transaction is either approved or declined, and the process is complete.

In some instances, especially those involving "card not present" transactions, such as online transactions, additional information may be requested, such as:

• Credit card billing address and zip code.
• Card security number, or CVV.
• Card expiration date.

The idea is to make the transaction as secure as possible to prevent fraudulent spending and protect consumers.

Credit Card Security

Credit card security is of increasing importance. As technology has evolved to protect consumers from fraud, so have efforts of bad actors to circumvent those defensive efforts. With credit card fraud being the most common tool used to commit identity theft, consumers may fear getting credit cards altogether. Fortunately, each of the four credit card networks offers zero percent liability to consumers in cases of credit card fraud.

Contactless Payments

Part of the new technology surrounding credit cards involves contactless payments. These types of payments utilize near-field communication to enable credit card payments without providing physical contact between the credit card and the point-of-sale device. The technology that makes this possible is called RFID or radio frequency identification, and it is substantially more secure than using your credit card's magnetic stripe to initiate transactions.

Mobile Payments & Digital Wallets

The terms "mobile payments" and "digital wallets" are often used interchangeably. Still, there are a few key differences between the two. You use digital wallets for digital or online transactions. In contrast, mobile wallets or payments allow your mobile phone to serve as a proxy for your credit card. It means you can carry your mobile phone, or in some cases, your smartwatch, and leave your card at home. These transactions will be treated like "card present" transactions by retailers who accept mobile payments.