A plastic card which is used instead of cash or cheque to pay for goods or services. Card holders present their card when making a payment. The credit-card company sends a statement of account monthly to each account holder, listing their purchases and showing the sum of money owed. If the statement is settled in full by a specified date, no interest is payable. The best-known companies are Visa, Mastercard, and American Express. Credit cards differ from charge cards, in that there is a specified credit limit. Charge cards have no limit, but full repayment is to be made each month.
A credit card system is a type of retail transaction settlement and credit system, named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the users' account after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the user). It is also different from a charge card (though this name is sometimes used by the public to describe credit cards), which requires the balance to be paid in full each month. In contrast, a credit card allows the consumer to 'revolve' their balance, at the cost of having interest charged.
How they work
A user is issued a credit card after an account has been approved by the credit provider (often a general bank, but sometimes a captive bank created to issue a particular brand of credit card, such as Wells Fargo or American Express Centurion Bank), with which the user will be able to make purchases from merchants accepting that credit card up to a pre-established credit limit.
When a purchase is made, the credit card user agrees to pay the card issuer.
Electronic verification systems allow merchants (using a strip of magnetized material on the card holding information in a similar manner to magnetic tape or a floppy disk) to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase.
Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, and the total amount owed.
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid. (See The TD Gold Travel Visa Cardholder Agreement Retrieved January 3, 2006)
The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument.
Because of intense competition in the credit card industry, credit providers often offer incentives such as frequent flier points, gift certificates, or cash back (typically up to 1 percent based on total purchases) to try to attract customers to their program.
Low interest credit cards or even 0% interest credit cards are available. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. However, services are available which alert credit card holders when their low interest period is due to expire.
Grace period
A credit card's grace period is the time the customer has to pay the balance, before interest is charged to the balance. Grace periods vary, but usually range from 10 - 55 days depending on the type of credit card and the issuing bank.
The merchant's side
For merchants, a credit card transaction is often more secure than other forms of payment, such as cheques, because the issuing bank commits to pay the merchant the moment the transaction is verified. In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges.
In some countries, like the Nordic countries, banks guarantee payment on stolen cards only if ID card is checked.
Secured credit cards
A secured credit card is a type of credit card secured by a deposit account owned by the cardholder. In some cases, credit card issuers will offer incentives even on their secured card portfolios.
The cardholder of a secured credit card is still expected to make regular payments, as he or she would with a regular credit card, but should he or she default on a payment, the card issuer has the option of recovering the cost of the purchases paid to the merchants out of the deposit.
Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be credited simply for missing one or two payments. This means that an account which is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance which is much higher than the actual credit limit on the card.
Secured credit cards are an option to allow a person with a poor credit history or no credit history to have a credit card which might not otherwise be available. Fees and service charges for secured credit cards often exceed those charged for ordinary non-secured credit cards, however, for people in certain situations, (for example, after charging off on other credit cards, or people with a long history of delinquency on various forms of debt), secured cards can often be less expensive in total cost than unsecured credit cards, even including the security deposit.
Features
As well as convenient, accessible credit, the cards offer consumers an easy way to track expenses, which is necessary both for monitoring personal expenditures and the tracking of work-related expenses for taxation and reimbursement purposes. They have now spread worldwide, and are offered in a huge variety of permutations with differing credit limits, repayment arrangements such as automatic payment from a personal bank account (some cards offer interest-free periods, while others do not but compensate with much lower interest rates), and other perks (such as rewards schemes in which points earned by purchasing goods with the card can be redeemed for further goods and services or credit card cashback).
Some countries such as the United States, the United Kingdom and France limit the amount for which a consumer can be held liable due to fraudulent transactions as a result of a consumer's credit card being lost or stolen.
Security
The low security of the credit card system presents countless opportunities for fraud. This opportunity has created a huge black market in stolen credit card numbers, which are generally used quickly before the cards are reported stolen.
The goal of the credit card companies, as they say, is not to eliminate fraud, but to "reduce it to manageable levels", such that the total cost of both fraud and fraud prevention is minimized.
Most Internet fraud is done through the use of stolen credit card information which is obtained in many ways, the simplest being copying information from retailers, either online or offline. It is not unusual for employees of companies that deal with millions of customers to sell credit card information to criminals.
Despite efforts to improve security for remote purchases using credit cards, systems with security holes are usually the result of poor implementations of card acquisition by merchants. For example, a website that uses SSL to encrypt card numbers from a client may simply email the number from the webserver to someone who manually processes the card details at a card terminal.
The Federal Bureau of Investigation is the agency responsible for prosecuting criminals who engage in credit card fraud in the United States, but they do not have the resources to pursue all criminals. Three improvements to card security have been introduced to the more common credit card networks but none has proven to help reduce credit card fraud so far. Second, the cards themselves are being replaced with similar-looking tamper-resistant smart cards which are intended to make forgery more difficult. The majority of smartcard (IC card) based credit cards comply with the EMV (Europay MasterCard Visa) standard. Third, an additional 3 or 4 digit code is now present on the back of most cards, for use in "card not present" transactions.
Profits and losses
In recent times, credit card portfolios have been very profitable for banks, largely due to the booming economy of the late nineties.
Costs
Credit card issuers (banks) have several types of costs:
Interest expenses
Banks generally borrow the money that they then lend to their customers.
Operating costs
This is the cost of running the credit card portfolio, including everything from paying the executives who run the company to printing the plastics to mailing the statements to running the computers that keep track of every cardholder's balance to taking the many phone calls which cardholders place to their issuer to tracking down fraud rings to protect the customers.
Charge offs
Some customers never pay their credit card bill. In any given year, a significant portion of the money that a bank lends to its credit card customers will never be repaid.
Rewards
Many credit card customers receive rewards, such as frequent flier points, gift certificates, or cash back as an incentive to use the card.
Fraud
Where a card is stolen, or an unauthorized duplicate made, most card issuers will refund some or all of the charges that the customer has received for things they did not buy. These refunds will in some cases be at the expense of the merchant, especially in mail order cases where the merchant cannot claim sight of the card, but in other cases, these costs must be borne by the card issuer. In several countries merchants will lose the money if no ID card was asked for, therefore merchants usually require ID card in these countries. Credit card companies generally guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays their credit card bill. The merchant pays a merchant discount fee that is typically 2 to 3 percent (this is negotiated, but will vary not only from merchant to merchant, but also from card to card, with business cards and rewards cards generally costing the merchants more to process), which is why some merchants prefer cash, debit cards, or even cheques. With a corporate card, the interchange is also often shared by the company in whose name the card is issued as an incentive to use that issuer's card instead of someone else's.
The interchange fee that applies to a particular merchant is a function of many variables including the type of merchant, the merchant's average ticket dollar amount, whether the cards are physically present, if the card's magnetic stripe is read or if the transaction is hand-keyed, the specific type of card, when the transaction is settled, the authorized and settled transaction amounts, etc. For a typical credit card issuer, interchange fee revenues may represent about fifteen percent of total revenues, but this will vary greatly with the type of customers represented in their portfolio. Customers who carry high balances may generate low interchange revenue due to credit line limitations, while customers who use their cards for business and spend hundreds of thousands of dollars a year on their cards while paying off balances every month will have very healthy interchange revenues. Interest charges vary widely from card issuer to card issuer. some banks have chosen to establish their credit card operations in states such as South Dakota that have less restrictive limits on interest rates. (2) charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake); a few financial institutions charge no fee for this — it is worth noting as an aside that the credit card issuer charges a fee on top of the international bank rate when converting currency, which in most circumstances is a better rate than is available elsewhere, even with the fee added on);
Neutral consumer resources
Canada
The Government of Canada maintains a database of the fees, features, interest rates and reward programs of nearly 200 credit cards available in Canada. This database is updated on a quarterly basis with information supplied by the credit card issuing companies. It is available in PDF-file comparison tables that break down the information according to type of credit card, allowing the reader to compare the features of, for example, all the student credit cards in the database. The interactive tool uses several interview-type questions to build a profile of the user's credit card usage habits and needs, eliminating unsuitable choices based on the profile, so that the user is presented with a small number of credit cards and the ability to carry out detailed comparisons of features, reward programs, interest rates, etc.
History
The credit card was the successor of a variety of merchant credit schemes. The fractured nature of the US banking system meant that credit cards became an effective way for those who were travelling around the country to, in effect, move their credit to places where they could not directly use their banking facilities.
There are now countless variations on the basic concept of revolving credit for individuals (as issued by banks and honored by a network of financial institutions), including organization-branded credit cards, corporate-user credit cards, store cards and so on. In many countries acceptance still remains poor as the use of a credit card system depends on the banking system being perceived as reliable.
In contrast, because of the legislative framework surrounding banking system overdrafts, some countries, France in particular, were much faster to develop and adopt chip-based credit cards which are now seen as major anti-fraud credit devices.
Controversy
Credit card companies do not want merchants to charge credit card users more than they charge other customers, even though the merchant pays a fee of 2 to 3 percent (merchants negotiate an exact percentage with their banks) to process credit payments. Some critics have observed that this results in what is effectively a hidden tax on all transactions conducted by merchants who accept credit cards since they must build the cost of transaction fees into their overall business expense. The cost of the convenience enjoyed by card holders and the profits taken from transaction fees by the card industry (which has come to rely increasingly on this revenue stream over the years) is partially offloaded onto the backs of the cash customer.
A counter argument is that there are also costs to the merchant in other forms of payment For cash payments these include frequent trips to the bank or use of an armored delivery service, theft, and employee error, such that cash is actually not cheaper for the merchant than credit cards. In the United Kingdom, merchants won the right through The Credit Cards (Price Discrimination) Order 1990 to charge customers different prices according to the payment method, but few merchants do so (the most notable exceptions being budget airlines and travel agents).
However, there also exists an economic argument that credit card use increases the "velocity" of money in an economy, the result, higher consumer spending rates and higher GDP.
There is some controversy about credit card usage in recent years. Since the late 1990s, lawmakers, consumer advocacy groups, college officials and other higher education affiliates, have become increasingly concerned about the rising use of credit cards among college students. The major credit card companies have been accused of targeting a younger audience, in particular college students, many of whom are already in debt with college tuition fees and college loans, and who typically are less experienced at managing their own finances. Since eighteen year-olds in many countries and most U.S. states are eligible for a card without parental consent or employment, the likelihood of increased balances, unwise use of credit and damaged credit scores increases.
According to Larry Chiang of United College Marketing Services, an example of a credit card class action was where issuers were "rolling back" posting times to extract more late fees.
Providian: US$405 million Citibank: US$15.5 million Chase: US$22.2 million Bank One: US$40 millionAnother controversial area is the universal default feature of many North American credit card contracts. When a cardholder is late paying a particular credit card issuer, that card's interest rate can be raised, often considerably. Given this circumstance with one credit card, universal default allows other card issuers to raise the cardholder's interest rates on other accounts, even if those other accounts are not in default.
In the USA, Congress has been slow to introduce credit card reform legislation. A push toward expanding the disclosure box and incorporating balance payoff disclosures on credit card statements could help clarify credit card debt's ramifications.
Minimum payments
In the UK, there has recently been increasing concern about the minimum payments required on outstanding credit card balances. Typically, credit card companies now only require a monthly minimum payment of between 2% and 3% of the outstanding balance, or a fixed cash fee, whichever is the greater. An example of this: by paying 2.5% of the debt each month, while accruing interest at 14% (in line with modern credit card interest rates), it can take over 14 years to pay back an original debt of £1,000.
It has recently been suggested that credit card companies include a warning on their statements discouraging customers from paying only the minimum, however few companies have so far acted upon this.
Starting in 2006, most US credit card companies regulated by the Office of the Comptroller of the Currency have been required to increase customers' minimum payments to cover at least the interest and late fees from the prior statement plus 1% of the outstanding balance. Uninformed cardholders often inquire as to what amount they need to pay by their due date in order to have paid off their credit card in full and to stop interest from accumulating.
Credit card numbering
The numbers found on credit cards have a certain amount of internal structure, and share a common numbering scheme.
The card number's prefix, called the Bank Identification Number, is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs.
In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and security codes.
Credit cards in ATMs
Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the card but many card issuers charge interest on cash advances before they do so on purchases. Many card issuers levy a commission for cash withdrawals, even if the ATM belongs to the same bank as the card issuer. Merchants do not offer cashback on credit card transactions because they would pay a percentage commission of the additional cash amount to their bank or merchant services provider, thereby making it uneconomical.
Many credit card companies will also, when applying payments to a card, do so at the end of a billing cycle, and apply those payments to everything before cash advances.
Credit card networks
American Express Bankcard China UnionPay Diners Club Discover JCB MasterCard VISACredit card scams in popular culture
A credit card scam was also the subject of several episodes of the popular HBO series, The Sopranos, pulled off by Benny Fazio.Credit cards as funding for entrepreneurs
Credit cards are a creative yet often risky way for entrepreneurs to acquire capital for their start ups when more conventional financing are unavailable.
Collectible credit cards
A growing field of numismatics (study of money), or more specifically Exonumia (study of money-like objects), credit card collectors seek to collect various embodiments of credit from the now familiar plastic cards to older paper merchant cards, and even metal tokens that were accepted as merchant credit cards.
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