Tuesday, November 06, 2007

How The Credit Card System Works

Smart use of your credit cards is important, and it is not how many cards you possess.

If there are advantages to possessing many credit cards it is in their proper use, not in their dollars of potential credit.

Here's how credit cards work:

Banks cooperate with each other to closely to track their cardholders, and most banks want to know how many credit cards you now have before they issue one of their own.

Banks share computer files to trade cardholder information. When a bank discovers you have too many cards (each bank has their own policy on how many cards are “too many”), they automatically reject your application.

Banks that offer the same card usually disallow repeat cards to a cardholder.

You normally may obtain only one card from an interconnected network of cooperating banks.

How does a bankcard system actually work?

When you apply for a credit card at your local bank, many events occur. While your local bank’s name is displayed on your credit card, odds are that your card was instead issued by a different bank.

Interconnected banks trade favors and reciprocate functions.

Banks also hire each other to perform different services to cut their overall costs.

Bank card systems are complicated.

First, they must accept new applications, obtain credit reports, and establish approved accounts.

Then the actual cards must be printed and embossed. Ongoing paperwork includes preparing and mailing billing statements, sales brochures, late payment notices, and other details that make a credit card program succeed.

Few banks undertake every function required to operate a credit card program. To avoid complicated and costly processes, some banks act as credit card agents for others. Usually smaller banks contract with the larger banks for card-related services.

The largest card processing centers usually handle accounting, credit checks, mailings, statements, collections, and administrative details for smaller banks.

The smaller banks pay, as a fee, a percentage of its annual credit volume. Both the large and small banks benefit from this relationship.

Bank networks commonly share parts of the credit card process.

One bank may offer applications; another may handle credit checks; a third (or fourth) bank the embossing and monthly statement function.

Major networks may have many lines of agent banks stretching out in a lengthy chain. Other networks may encompass only three or four agent banks.

So what happens if you simultaneously apply for credit cards from several local banks?

Although you may apply to different banks, many will be connected to the same major bank. This, of course, raises two possibilities:

1) The major bank will have a relationship with the agent banks that prevents the applicant from obtaining more than one card from the major bank. Even if you apply to twelve banks connected to the same major bank, the major bank will only issue one card.

All others are automatically cancelled as they enter the central computerized system. Your credit card will bear the name of the accepting bank. But in the process you generated potentially harmful numbers of inquiries on your credit report.

2) A major bank will issue several cards to the same individual if the agent bank assumes responsibility for your credit. The agent bank would then assume responsibility for any default in payment.

So before you apply for a credit card make sure that you do not already have one from that issuing bank.

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