Final answer:
Businesses get paid by the credit card company at the time of the transaction, despite customer defaults. The customer's debt is to the credit card company, which may charge late fees and interest. The business is unaffected by the customer's default, having received payment upfront.
Step-by-step explanation:
When a customer purchases with a credit card and defaults on the payment, the business typically still gets paid. This is because the credit card company transfers the funds to the seller at the time of the transaction, essentially providing a short-term loan to the cardholder. The obligation to pay then rests between the cardholder and the credit card company, not the business and the cardholder.
In the case of default, the credit card company imposes late fees and interest on the unpaid balance. For instance, a company may charge a $10 late fee, followed by an additional $5 a day for each day the payment remains unpaid. These fees contribute to the revenue of the credit card company and are meant to encourage timely payments while also compensating for the risk of lending credit.
When a cardholder sends a payment towards their credit card debt, part of the payment covers the principal, which is the original debt amount, while the rest may cover the accumulated interest. Creditors have specific formulas they use to calculate the minimum payment due each month until the cardholder has paid off their balance.