Millions of people worldwide depend on credit cards daily, making them the cornerstone of modern financial transactions.
Both consumers and businesses must comprehend the credit card life cycle.
The stages of the credit card lifecycle, the role of authorization, and the ways that effective credit card life cycle management may help all parties involved will all be covered in detail in this blog.
What is the Credit Card Lifecycle?
The phases that a credit card goes through from issuance to ultimate expiry or cancellation are referred to as the credit card lifecycle.
Different technology, parties, and procedures are involved at each level. Understanding the credit card lifecycle helps issuers and cardholders better manage financial operations and security.
Read about: How Credit Card Transaction Processing Works? A Quick Guide
Stages of the Credit Card Lifecycle
Issuance
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Application and Approval
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The application process is where the lifecycle starts. Businesses or individuals use banks or other financial institutions to apply for credit cards.
Creditworthiness, income, and other criteria are used to evaluate the application. Credit bureaus provide the issuer with the applicant’s credit history at this point so they may make an educated choice.
If granted, the applicant’s credit score and financial stability are used to calculate the credit limit and interest rates.
Depending on the bank’s internal procedures and how comprehensive the credit check is, this process may take a few days to a few weeks.
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Card Creation and Distribution
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After approval, a unique number, expiration date, and CVV are added to the card. After that, the cardholder receives the actual card by mail.
To improve transaction security, this step also entails integrating security measures including contactless payment methods, magnetic stripes, and EMV chips.
To guard against any interception or misuse, issuers must make sure the cards are manufactured and distributed securely.
Activation
The card must be activated by the cardholder when it is received. Usually, a phone call or web gateway is used for this.
After activation, the card is guaranteed to be connected to the cardholder’s account and operational. This step also acts as an extra security check to make sure the card has been sent to the correct person.
A one-time password (OTP) provided to the registered email address or cellphone number may also be required by certain banks to finish the activation procedure, which would offer an additional degree of protection.
Usage
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- Transactions:
Credit cardholders make both in-person and online transactions using their cards. Every transaction involves several steps, including authorisation, authentication, and settlement.
Cardholders can also use their credit cards for cash advances, which allow them to withdraw cash from ATMs or banks, however these transactions usually come with higher fees and interest rates.
Since credit cards are practical for a range of transactions, many consumers opt to use them.
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- Authorization:
This is an essential step in the life cycle of a card payment. The merchant asks the card issuer for authorization when a purchase is made.
Before accepting or rejecting the transaction, the issuer monitors the cardholder’s account for adequate credit and possible fraud.
This procedure guarantees that there is sufficient credit available to the cardholder and that the transaction does not go over any predetermined limitations or seem questionable.
The cardholder has a smooth experience because authorization usually takes place in a matter of seconds.
Read about: Online Payment Security: Best Practices to Keep Your Transactions Safe
Billing and Payment
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- Billing Statement:
The cardholder receives a statement after each billing cycle that lists all transactions, fees, and the minimum amount owed.
The statement offers a thorough breakdown of the cardholder’s expenses, including interest and any late penalties, and the payment cycle normally lasts 28–31 days.
Cardholders can detect any unauthorized transactions and keep track of their spending by routinely reviewing the billing statement.
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- Payment:
To avoid penalties, cardholders must pay at least the minimum amount before the deadline. Interest costs can be avoided by making the full payment during the grace period.
Direct debit, online banking, and in-person bank visits are among the methods of payment.
You must make your payments on time if you want to keep your credit score good and prevent more expenses.
Some cardholders find that setting up automated payments to ensure they never miss a due date is incredibly beneficial when managing several credit cards.
Rewards and Benefits
Numerous credit cards come with cashback, incentives, and other perks. These may be redeemed regularly and are determined by usage.
Points for eating, shopping, travel, and other activities can be earned through rewards programs. Additionally, some cards include special benefits like purchase protection, travel insurance, and access to airport lounges, which raises the card’s total worth.
Cardholders, particularly those who travel frequently or make major purchases, can greatly benefit from understanding the individual reward system and making the most of it.
Renewal or Expiration
The normal validity term for credit cards is three to five years. A replacement card is sent by issuers close to the expiration date.
It is possible to cancel a card if the holder no longer needs it. The card is reissued with updated security features and designs each renewal, guaranteeing ongoing defense against changing fraud tactics.
To prevent any delays in obtaining their replacement card, cardholders should make sure that their contact details are current with the issuer.
Cancellation or Termination
A credit card can be canceled at any moment by the cardholder. The card may also be canceled by the issuer for fraud or nonpayment. Controlling cancellation effectively aids in preventing unwanted use.
To prevent service interruptions, cardholders are encouraged to pay off any outstanding balances before canceling and to inform recurring payment services of the card’s termination.
In some circumstances, it may be helpful for some issuers to offer the option of temporarily freezing the card rather than canceling it completely.
The Role of Authorization in the Credit Card Lifecycle
Authorization is a cornerstone of the card payment life cycle. Here’s how it works:
Transaction Initiation:
When a cardholder initiates a transaction, the merchant notifies the card issuer of the authorization request.
This request contains information like the merchant ID, transaction amount, and card number.
When a cardholder swipes their card, taps it on a contactless terminal, or enters their information online, the procedure begins.
Issuer Verification:
The issuer looks for fraud indications, available credit, and card information.
This entails processing the transaction through fraud detection algorithms, confirming the card’s legitimacy, and ensuring there is enough credit.
Machine learning and historical data are used by contemporary fraud detection systems to instantly spot possibly fraudulent transactions.
Approval or Decline:
The issuer either accepts or rejects the transaction based on the verification. Transactions that have been approved move forward to the settlement stage.
If a transaction is denied, the cardholder might need to get in touch with the issuer to get clarity or to address any problems, such as going over the credit limit or even becoming the victim of fraud.
To quickly identify any decreases and discuss them with their issuer, cardholders should routinely check their transaction notifications.
By ensuring that transactions are safe and authentic, authorization shields cardholders and retailers from fraud. To preserve confidence in the credit card payment system, this step is essential.
Issuers frequently offer codes or explanations for refused transactions to assist cardholders and retailers in understanding the rationale behind the denial.
Read about: Major Types of Payment Fraud and How to Avoid Them?
Credit Card vs. Debit Card Life Cycle
There are some significant distinctions in the life cycles of credit and debit cards, despite their similarities:
Credit Cards:
Give users the ability to borrow money up to a certain amount. Billing and payment for transactions are done later.
They provide a grace period for payments, during which new purchases are free of interest. Rewards programs and other benefits are frequently included with credit cards to encourage use.
Debit cards:
Debit cards are used to take money straight out of the cardholder’s bank account. All transactions are paid right away.
Debit cards are a simple way to manage everyday costs without running the danger of accruing debt because they usually don’t provide incentives or a credit facility
Debit cards are often preferred by those who wish to limit their expenditure or avoid debt.
Customers need to understand these differences when choosing between credit and debit options.
Each has benefits and drawbacks based on the cardholder’s needs and spending patterns.
Financial experts usually recommend using credit cards for large purchases that may qualify for rewards and consumer protections, while debit cards are recommended for daily spending to avoid overspending.
Credit Card Life Cycle Management
Issuers, retailers, and consumers must manage the credit card life cycle effectively.
It entails:
Fraud Prevention:
To stop illegal transactions, strong security measures must be put in place at every stage of the lifecycle.
This covers cutting-edge technology like two-factor authentication, tokenization, and chip cards. To stay ahead of changing cyber threats, security systems must be updated regularly.
Customer service:
Delivering effective cardholder service, including addressing billing disputes, reward inquiries, and lost or stolen cards.
User loyalty and happiness are increased by providing exceptional customer service. To give prompt support, several issuers now provide 24/7 customer service via a variety of channels, including chatbots.
Technology Integration:
Technology integration is the use of state-of-the-art technology to enhance user experience, boost security, and speed up processes.
The credit card business is evolving due to innovations like contactless payments, smartphone wallets, and fraud detection systems driven by artificial intelligence.
By using these technologies, issuers may provide their customers faster and safer transaction experiences.
Benefits of Efficient Life Cycle Management
- For Issuers
- Reduces fraud-related losses by employing proactive security measures.
- Enhances customer satisfaction and retention through seamless services and support.
- Streamlines operations, reducing costs and improving profitability. Efficient management also allows issuers to launch new products and services faster, keeping them competitive in the market.
- For Merchants
- Ensures faster, more reliable transactions, improving the checkout experience.
- Reduces chargebacks and disputes, minimizing financial risks.
- Improves customer trust and loyalty, encouraging repeat business. Merchants that offer smooth and secure payment processes are more likely to retain customers and attract new ones.
- For Cardholders
- Provides a secure and convenient payment method, enhancing spending confidence.
- Offers rewards and benefits for usage, adding value to every transaction.
- Enables easy tracking and management of expenses, helping in budgeting and financial planning. Cardholders who manage their credit card use effectively can build a strong credit history, which is beneficial for future financial endeavors like loans or mortgages.
Conclusion
Comprehending the credit card lifecycle is crucial for efficient and safe money management. Every step of the cancellation application process is essential to maintaining credit cards as a dependable and advantageous tool for both customers and companies.
All parties concerned should prioritize effective credit card life cycle management as it improves security, operational effectiveness, and consumer happiness.
Users may minimize possible hazards and optimize the advantages of their credit cards by remaining knowledgeable about each stage and the related best practices.
The credit card lifecycle will change as consumer behavior and technology advance, presenting the financial sector with both new possibilities and difficulties.
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