|
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 the creditcard issuer lends the consumer
money rather than having the money removed from an account.
It is also different from a charge card (though this name
is often used to describe credit cards by the public) in that
charge cards do not extend the user credit -- the charges
must be paid each month in full. Most credit cards are the
same shape and size, as specified by the ISO 7810 standard.
How the Creditcard works
A credit card user is issued after approval from a provider
(often a general bank, but sometimes from a captive bank created
to issue a particular brand of credit card, such as American
Express Centurion Bank), in which they will be able to make
purchases from merchants supporting that credit card up to
a prenegotiated credit limit. When a purchase is made, the
credit card user indicates his/her consent to pay, usually
by signing a receipt with a record of the card details and
indicating the amount to be paid. More recently, electronic
verification systems have allowed 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 creditcard 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. Some
services can be paid for over the telephone by credit card
merely by quoting the number embossed onto the card (the credit
card number), and they can be used in a similar manner to
pay for purchases from online vendors.
Each month, the credit card user is sent a statement indicating
the purchases undertaken with the card, and the total amount
owed. The cardholder must then pay a minimum proportion of
the bill by a due date, and may choose to pay more or indeed
pay the entire amount owed. The credit provider charges interest
on the amount owed (typically at a much higher rate than most
other forms of debt). Credit card issuers may waive interest
charges if the balance is paid in full each month, which allows
the credit card to serve as a form of revolving credit, or
they may choose to apply any payments toward recent rather
than previous debt. Interest rates can vary considerably from
card to card, and the interest rate on a particular creiditcard
may jump dramatically if the card user is late with a payment
on that card or any other credit instrument. As the rates
and terms vary, services have been set up allowing users to
calculate savings available by switching cards, which can
be considerable if there is a large outstanding balance (see
external links for some on-line services).
Because profit margins in the credit card industry can be
quite high, credit providers often offer incentives such as
frequent flier miles, gift certificates, or cash back (typically
1 percent) to try attract customers to their program.
Secured
credit cards
A secured credit card is a type of credit card in which you
must first put down a deposit between 100% and 200% of the
total amount of credit you desire. Thus if the holder puts
down $1000, he or she will be given credit in the range of
$500–$1000. This deposit is held in a special savings
account. The owner of the secured credit card is still expected
to make regular payment, as he or she would with a regular
credit card, but should he or she default on a payment, the
card issuer can deduct payments on the card out of the deposit.
Secure credit cards are an advantage to anyone with, without,
or with poor credit history. They are often offered as a means
of rebuilding one's credit. Secured credit cards are available
with both Visa and MasterCard logos on them.
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 (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"
for purchasing goods with the card can be reclaimed for further
goods and services).
In theory, some countries such as the United States limit
the amount that a consumer can be held liable for fraudulent
transactions with the intention to shift the liability to
the merchant. In reality, however, merchants and creditcard
companies are always trying to hold the consumer liable.
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 creidit 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. This implies that high-cost low-return fraud
prevention measures will not be used if their cost exceeds
the potential gains from fraud reduction. Contrary to what
credit card companies advertise, many times the consumer is
held liable for fraudulent charges and their high-paid lawyers
ensure that the burden of proof lays with the consumer.
Most Internet fraud is done through the use of stolen creditcard
information which is obtained in many ways, the simplest being
copying information from retailers, either online or offline.
There have been many cases of hackers obtaining huge quantities
of credit card information from company databases. Not unusual
are cases of employees of companies that deal with millions
of customers in which they were selling the 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 aquisition 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. Naturally, anywhere card details become human-readable
before being processed at the aquiring bank is a security
risk. However, many banks offer systems such as ClearCommerce,
where encrypted card details captured on a merchant's webserver
can be sent directly to the payment processor.
The Federal Bureau of Investigation is the agency responsible
for prosecting criminals who engage in credit card fraud,
but they do not have the resources to pursue all criminals.
In general, they only prosecute in cases exceeding $5,000
in value. Even though the FBI usually does not investigate,
most common credit card networks have not implemented procedures
to prevent credit card fraud. 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.
First, the on-line verification system used by merchants is
being enhanced to require a 4 digit Personal Identification
Number (PIN) known only to the card holder. 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 Visa MasterCard) 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.
See CVV2 for more information.
Profits and losses
Credit card issuers (banks) cover their costs (including the
interest costs for the money that is paid to merchants prior
to the bank being paid by customers), and earn profits, by:
*
Interchange fees. Interchange fees are charged by the merchant's
acquirer to a card-accepting merchant as component of the
so-called merchant discount fee. The merchant pays a merchant
discount fee that is typically 2 to 3 percent (this is negotiated),
which is why some merchants prefer cash, debit cards, or even
checks. The majority of this fee, called the interchange fee,
goes to the issuing bank, but parts of it go to the processing
network, the card brand (Visa, MasterCard, etc.), and the
merchant's acquirer. The interchange fee that applies to a
particular merchant is a function of many variables including
the type of merchant, whether the cards are physically present
and the card's magnetic stripe is read, the specific type
of card, etc. For a typical credit card issuer, interchange
fee revenues may represent about fifteen percent of total
revenues.
* Charging interest on outstanding balances. Customers who
do not pay in full the amount owed on their monthly statement
(the "balance") by the due date (that is, at the
end of the "grace period") owe interest ("finance
charges"). These customers are known in the industry
as "revolvers". Those who pay in full (pay the entire
balance) do not. These customers are known in the industry
as "transactors". Interest charges vary widely from
card issuer to card issuer. Often, there are "teaser"
rates in effect for initial periods of time (as low as zero
percent for, say, six months), whereas rates for those with
poor credit can be as much as 29.74 percent (annualized).
In the U.S. rules governing interest rates are set at the
state level; some banks have chosen to establish their credit
card operations in states such as South Dakota that have less
restrictive limits on interest rates.
* Fees charged to customers. The major fees are for (1) payments
received late (past the "grace period"); (2) charges
that result in exceeding the credit limit on the card (whether
done deliberately or by mistake); (3) cash advances and convenience
checks (often 3 percent of the amount); (4) transactions in
a foreign currency (as much as 3 percent of the amount; a
few financial institutions charge no fee for this); and (5)
an annual payment. Credit card companies generally do provide
a guarantee the merchant will be paid on legitimate transactions
regardless of whether the consumer pays their credit card
bill. However, credit card companies generally will not pay
a merchant if the consumer challenges the legitimacy of the
transaction and will fine merchants who have a large number
of chargebacks.
In recent times, credit card portfolios have been exceedingly
profitable to banks, largely due to the booming economy of
the late nineties. However in the case of credit cards, such
high returns go hand in hand with risk, since the business
is essentially one of making unsecured (uncollateralized)
loans, and thus dependent on borrowers to not default in large
numbers.
In some areas, such as Ireland, governments profit from credit
cards through the imposition of a stamp duty or credit card
tax. This is usually done where a cheque tax previously existed.
This tax is taken automatically from the account, just like
a purchase, by the bank on behalf of the government annually.
This tax - unlike its cheque counterpart - is payable in arrears
so no refund is possible.
History
The credit card was the successor of a variety of merchant
credit schemes. It was first used in the 1920s, in the United
States, specifically to sell fuel to a growing number of automobile
owners. In 1938 several companies started to accept each other's
cards.
The concept of paying merchants using a card was invented
in 1950 by Frank X. McNamara in order to consolidate multiple
cards. The Diners Club produced the first charge card, which
is similar but required the entire bill to be paid with each
statement; it was followed shortly thereafter by American
Express.
Bank of America created the BankAmericard in 1958, a product
which eventually evolved into the Visa system ("Chargex"
also became Visa). MasterCard came to being in 1966 when a
group of credit-issuing banks established MasterCharge. The
fractured natuire of the US banking system meant that it 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 contrast, although having reached very high adoption levels
in the US and the UK, it is important to note that in other
cultures which were much more cash-oriented in the latter
half of the twentieth century such as Germany, France, Switzerland
among many others, take-up of credit cards was intially much
slower. It took until the 1990s to reach anything like the
percentage market-penetration levels achieved in the USA or
UK. 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 the major anti-fraud credit devices.
There is some controversy about credit card usage in recent
years. Credit card debt has soared, particularly among young
people. 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. Credit card usage has tripled
since 2001 amongst teenagers as well. The United Kingdom is
the world's most credit-card-intensive country, with 67 million
credit cards for a population of 59 million people.
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. A recent study has shown that
both the number of students owning a credit card and the amount
of credit card debt held by students has risen in the recent
years. Since eighteen year-olds in many countries and most
U.S. states are eligible for a card without parental consent
or employment, many have been concerned that students will
use credit unwisely because of their financial inexperience
and suffer the long-term consequences of carrying high debt.
Some credit card companies, including Providian and Capital
One, are well known for pursuing legal judgments against borrowers,
garnishing wages and forcing sales of homes, adding in the
cost of legal fees, often exceeding several times the original
balance. This practice has encouraged numerous class actions
seeking redress for borrower's rights.
Card Type Prefix(es)
American Express 34 or 37 15
BankCard 560–561 16
Diners Club / Carte Blanche * 300–305, and 38 14
Discover Card 6011,6500–6509 ** 16
JCB 3 16
JCB 1800,2131 15
MasterCard 51–55, 36 14,16
Visa
In addition, the first 6 digits of the credit card number
are known as the Bank Identification Number (BIN). These identify
the institution that issued the card to the card holder.
Some credit card issuers choose to restrict the card numbers
they issue to those which pass a checksum test, where the
final digit of the card number is used to confirm the initial
digits.
Most Used American Credit Card
1. Visa
2. Mastercard
3. Citi
4. Discover
Credit card organizations
* American Express
* Citi
* Diners Club
* Discover
* JCB
* MasterCard
* VISA
See also
* Credit card debt
* Credit history
• Credit
Score
• Credit Risk
• Debt
* Debit card
* Electronic money
• Identity theft
* Loan
* Stored-value card
* Credit card fraud
• TransUnion
•
Tips
For Getting Your First Credit Card
This article is licensed under the GNU
Free Documentation License. It uses material from the
Wikipedia
article "Credit Card".
|
