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  • Writer's pictureMichael Sheats

What is Credit/Debit Card Processing and How Does It Work?

Credit/debit card processing is the process of accepting and processing payments made with credit or debit cards. It involves several parties, such as the cardholder, the merchant, the card issuer, the card network and the payment processor. Each party plays a role in ensuring that the transaction is authorized, verified and settled.

The Difference Between Credit and Debit Cards

Credit cards and debit cards are both plastic cards that can be used to make purchases online or in person. However, they have some key differences:

  • Credit cards allow cardholders to borrow money from the card issuer up to a certain limit and pay it back later with interest. Debit cards are linked to the cardholder’s bank account and deduct money directly from it when a purchase is made.

  • Credit cards usually offer rewards, such as cash back, points or miles, for using them. Debit cards may also offer some rewards, but they are usually less generous than credit cards.

  • Credit cards can help cardholders build credit history and improve their credit score if they pay their bills on time and keep their balances low. Debit cards do not affect the cardholder’s credit score at all.

  • Credit cards offer more protection against fraud and unauthorized charges than debit cards. If a credit card is lost or stolen, the cardholder is only liable for up to $50 of fraudulent charges. If a debit card is lost or stolen, the cardholder may be liable for up to $500 or more of fraudulent charges, depending on how quickly they report the loss.

The Stages of Credit/Debit Card Processing

Credit/debit card processing involves three main stages: authorization, clearing and settlement.


Authorization is the first stage of credit/debit card processing. It occurs when the cardholder presents their card to the merchant to make a purchase. The merchant then requests authorization from the payment processor, who communicates with the card network (such as Visa or Mastercard) and the card issuer (such as Bank of America or Chase) to verify the card’s validity and availability of funds.

If the card is valid and has enough funds or credit limit, the transaction is approved and an authorization code is sent back to the merchant. The merchant then completes the sale and provides a receipt to the cardholder. The authorized amount is temporarily held by the card issuer until the transaction is cleared and settled.

If the card is invalid or has insufficient funds or credit limit, the transaction is declined and an error message is sent back to the merchant. The merchant then informs the cardholder of the decline and asks for another form of payment.


Clearing is the second stage of credit/debit card processing. It occurs when the merchant sends a batch of authorized transactions to the payment processor at the end of the day or a predetermined period. The payment processor then forwards the batch to the card network, who calculates the fees and charges for each transaction and distributes them among the parties involved.

The card network also sends the transaction details to the card issuer, who posts them to the cardholder’s account and deducts or adds them to their balance. The card issuer then sends a statement to the cardholder at the end of each billing cycle, showing all their transactions and payments.


Settlement is the final stage of credit/debit card processing. It occurs when the payment processor transfers funds from the card issuer’s account to the merchant’s account, minus any fees and charges. This usually happens within one to three business days after clearing.

The settlement process completes the credit/debit card processing cycle and ensures that all parties receive their due payments.

The Costs of Credit/Debit Card Processing

Merchants who accept credit/debit card payments have to pay various fees to different parties involved in the process. These fees include:

  • Interchange fees: These are fees that merchants pay to the card issuers for each transaction. They depend on factors such as the type of card, transaction amount, industry and location.

  • Assessment fees: These are fees that merchants pay to the card networks for each transaction. They are usually fixed percentages based on the transaction amount.

  • Processor fees: These are fees that merchants pay to the payment processors for their services. They may include monthly fees, transaction fees, gateway fees, terminal fees and other charges.

  • Chargeback fees: These are fees that merchants pay when a cardholder disputes a transaction and requests a refund from their card issuer.

How to Get Started Accepting Credit and Debit Cards

If you want to accept credit and debit card payments for your business, you need to follow these steps:

1. Choose a payment processor: A payment processor is a company that handles the communication and transfer of funds between the cardholder, the merchant, the card network and the card issuer. You need to choose a payment processor that suits your business needs, budget and preferences. Some of the factors to consider when choosing a payment processor are:

  • The fees and charges they apply for each transaction and service

  • The types of cards and payment methods they support

  • The security and fraud prevention measures they offer

  • The customer service and technical support they provide

  • The integration options and compatibility with your existing systems and platforms

2. Set up a merchant account: A merchant account is a special bank account that holds the funds from your card transactions until they are transferred to your regular business account. Some payment processors offer their own merchant accounts, while others require you to set up one with a third-party provider. You need to apply for a merchant account and provide some information about your business, such as:

  • Your business name, address and contact details

  • Your business type, industry and legal structure

  • Your estimated sales volume and average transaction size

  • Your bank account details and tax identification number

3. Choose a payment method: Depending on how you sell your products or services, you need to choose a payment method that allows you to collect card information from your customers. There are different ways to accept card payments, such as:

  • In person: You can use a card reader or a credit card terminal that connects to your point-of-sale (POS) system or mobile device. You can also use a contactless payment method, such as NFC or QR code, that lets customers pay with their smartphones or smartwatches.

  • Online: You can use a payment gateway that integrates with your website or e-commerce platform. A payment gateway is a software that encrypts and transmits card data securely over the internet. You can also use an online invoicing tool that lets you send bills to your customers via email and allows them to pay online.

  • Over the phone: You can use a virtual terminal that lets you enter card information manually on your computer or mobile device. A virtual terminal is an online application that mimics the functions of a physical terminal.

4. Test and launch your payment system: Before you start accepting card payments from your customers, you need to test your payment system and make sure it works properly. You can use test cards or small transactions to check if your payment processor, merchant account, payment method and integration are functioning correctly. You also need to comply with the rules and regulations of the card networks and the payment industry standards, such as PCI DSS (Payment Card Industry Data Security Standard). Once everything is ready, you can launch your payment system and start accepting credit and debit card payments for your business.

Contact Sheats CNY Technologies if you would like more information on accepting cards as a form of payment for your business. Whether you're a new business or looking for better rates and even better support. Let us help you grow your business.

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