Most of us have more than one credit card in our wallets and use them on a daily basis, but have no idea how they work. We just swipe the card, sign the receipt and grab our bags and go. Credit cards do make out lives a bit easier and when used responsibly are the best source to build up credit scores. There is a lot that goes on behind the scenes after you swipe and I will try to explain. Hopefully you will have an understanding of how your money is distributed.

Merchant:

First you have the store, gas station, website, or anywhere you swipe or input your card number. We all know these places too well, so I won’t go into more details about them.

Acquirer:

Next you have what is called the acquirer or merchant credit card processing services, such as paypal.

Issuer:

The acquirer then send your information to the the issuing bank. This is the bank that you see printed on your card or the bank that you applied to for the card. The bank is the one lending you the money to buy your item.

The bank checks your account and make sure you have enough to cover your purchase. This information is the sent back to the credit card processing service and before they send it back to the merchant they take a small cut, which is split between them and Visa, Master card, Discover etc. The merchant get the green light and hands you a receipt and your item. The merchant takes there cut and use the rest to replace the item for the next customer.

All this takes place in a matter of seconds and is way more complicated then I make it sound, but these companies do there best to keep it as simple as possible for the cardholders. So, that is it, what happens after you swipe your credit card.

First let me explain how it works. Let’s say a mother has been very responsible when it comes to her bills, she has been paying on time and has built up a top notch FICO credit score. Now her daughter is of age and wants to start building her credit. The mother can place her daughter on her credit card account as an authorize user and within a short period of time, her credit score will transfer over to the daughter. To lenders, it will seems as if the daughter has been responsible and has build up her credit.

Piggybacking is a practice that has been in existence for many years and almost came to an end in 2008 due to abuse. Thanks to the FTC and the Federal Reserve Board, Fair Isaac Corporation revamped the practice with new rules. It is still as effective and being used by many to boost their credit scores.

To continue with my mother and daughter example, if the daughter was to miss a few payments, her mother’s credit score would take a hit as well and visa versa. Banks report authorize user information to the major credit reporting companies Experian, Equifax, and Transunion. As you know, anything dealing with credit is very delicate and every little mishap could take years to clear up.

If you are considering adding an authorized user to you credit card account, make sure you keep a close eye on your statements. If you are adding your child as an authorize user, try to limit the amount they can spend until they prove that it is something they can handle. Credit is a form of trust and once its broken it will take years to fix.

Personal Finance For dummies by Eric Tyson is written for beginners trying to get a handle on their finances. It is written so everyone can understand and use the information. It is definitely a good book for starting your financial journey and getting an understanding of investments, saving, and preparing for retirement.

While I am not a personal finance dummy, I did pick up a few gems that I will be putting into action in the near future. It also have some advice that I do not completely agree with, like cutting up all your credit cards. I think having one credit card is good for your credit, but it all depends on the individuals. Eric outlined some very good tips on shopping, that I have been living by for the last 8 years. He suggested thing like, buying in bulk and eating it before it goes bad. There is also advice on travelling, career, investing and just about every other aspect of personal finance.

I recommend Personal Finance For Dummies to beginners and intermediates. It’s not a must read for the seasoned money managers, but does have a few good tips. You can get it Amazon or at your local library.