Here is an article from a newsmagazine that explains how Credit Cards and Pay Pal work.

Paypal adds security, convenience to e-payments

By Daniel Greenberg, Gannett News Service

Internet auctions and Web sales can turn your personal computer into the cash

register of a thriving e-business overnight. But how do you collect money

without check-cashing hassles or the ability to process credit cards?

Paypal is an elegant system for making and

receiving secure, instantaneous payments

through Internet e-mail. And it's free.

You can use Paypal to send money to friends, e-commerce Web sites, Internet

auctions or anyone with an e-mail address.

How to start

You create a Paypal account by providing your personal data, such as your

credit card and/or bank information, and by verifying your e-mail address.

To send money, just go to the Paypal site, enter information, such as a person's

name, e-mail address and amount you want to send. The payee receives the

cash in his/her Paypal account at the speed of e-mail, billed to your Paypal

account (which is tied electronically to your credit card, debit card or checking

account).

The payee can ship you the item you bought right away, with no need to wait

for the mail to arrive and for the check to clear. And they never see your credit

card or bank account number.

You can even send money to someone who does not have a Paypal account,

though that person will have to sign up with Paypal to collect it.

Helpful for home businesses

If you run an auction or a small Web site selling homemade items, you can

request payment via Paypal. Just fill in the payment information, and send it out

like a bill.

To pay a bill, the customer confirms the transaction, and the money appears

instantly in your Paypal account.

Paypal will electronically transfer the money to your bank account or mail it to

you in the form of a check. (Paypal does not charge to send the money to your

bank, but some banks do charge to receive these payments. Check with your

bank.) Or you can leave the money in your Paypal account to make more

Paypal payments.

Safe for auctions

The Paypal service has become more common on auction sites because it's

fast, easy and gives you some additional protection against being ripped off by

unscrupulous auctioneers.

Paypal promises to investigate any Paypal sellers who do not ship what was

promised, and will give dissatisfied customers any money it can recover. Paypal

accounts are not insured by the government the way banks are, but Paypal

insures them up to $100,000 against unauthorized withdrawals.

The Paypal site has a growing list of e-commerce Web sites that accept Paypal

payments, including some charities. Paypal will even give you $5 for signing up

(with $100 in your account) and another $5 for each new person you refer to

Paypal.