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If you are like all Americans, you have made countless credit card purchases. You confidently swipe your credit card through the credit card terminal without having a second thought about how it works. Today, credit card purchases outnumber cash purchases and are considered the safest type of transaction.
How does it work? When you give your credit card to a merchant to make a purchase the credit card terminal reads the magnetic strip on your card. The system then transmits this information along with the merchant's ID code to a clearinghouse. These terminals have the capability of reading all types of cards.
The clearinghouse may be the bank issuing the merchant's credit account, or an independent firm contracted by the bank to clear charges for a fee. The data is transmitted over the phone from a computer at the credit card terminal. The clearinghouse then contacts the company or bank that issued the customer the credit card and verifies that the charge is acceptable. If the charge is accepted, the clearinghouse then sends a confirmation message to the merchant.
At the end of the day, the merchant's credit card terminal will contact the clearing house and verify all transactions making sure that all the records for the day match. Once the clearing house and the merchant agree that the records match, the clearinghouse will begin transferring money from the credit card bank to the merchant's bank account.
Knowing how an integral part of our lives work is important for all of us. The current trend is a movement towards a cashless consumer market. We will be using these terminals more and more in our everyday lives. Knowing how they work will help us understand more about it.