What is a Credit card?A credit card is a small plastic card issued to users as a systemof payment.It allows its holder to buy goods and services based on the holderspromise to pay for these goods and services.The issuer of the card creates a revolving account and grants a line ofcredit to the consumer (or the user) from which the user can borrowmoney for payment to a merchant or as a cash advance to the user.
• A credit card is different from a charge card: a charge card requiresthe balance to be paid in full each month.• In contrast, credit cards allow the consumers a continuing balanceof debt, subject to interest being charged.• A credit card also differs from a cash card, which can be used likecurrency by the owner of the card.• Most credit cards are issued by banks or credit unions, and are theshape and size specified by the ISO/IEC 7810 standard as ID-1. Thisis defined as 85.60 53.98 mm (33/8 21/8 in) in size.
History of Credit CardThe concept of using a card for purchases was described in 1887by Edward Bellamy in his utopian novel Looking Backward. Bellamyused the term credit card eleven times in this novel.The modern credit card was the successor of a variety of merchantcredit schemes. It was first used in the 1920s, in the United States, specifically tosell fuel to a growing number of automobile owners. In 1938 several companies started to accept each others cards.Western Union had begun issuing charge cards to its frequentcustomers in 1921.The concept of customers paying different merchantsusing the same card was expanded in 1950
History to present scenarioThe fractured nature of the U.S. banking system under the Glass–Steagall Act meant that credit cards became an effective way for thosewho were travelling around the country to move their credit to placeswhere they could not directly use their banking facilities. In1966 Barclaycard in the UK launched the first credit card outside of theU.S. Debit cards and online banking are used more widely thancredit cards in some countries as many cultures are morecash-oriented, or developed alternative forms of cash-lesspayments.
How credit cards workCredit cards are issued by a credit card issuer, such as a bank or creditunion, after an account has been approved by the credit provider, afterwhich cardholders can use it to make purchases at merchants acceptingthat card. When a purchase is made, the credit card user agrees to pay the cardissuer. The cardholder indicates consent to pay by signing a receipt witha record of the card details and indicating the amount to be paid or byentering a personal identification number (PIN).Many merchants now accept verbal authorizations via telephone andelectronic authorization using the Internet, known as a card not presenttransaction (CNP). For card not present transactions where the card isnot shown (e.g., e-commerce, mail order, and telephone sales),merchants additionally verify that the customer is in physical possessionof the card and is the authorized user by asking for additionalinformation such as the security code printed on the back of the card,date of expiry, and billing address.
Each month, the credit card user is sent a statement indicating thepurchases undertaken with the card, any outstanding fees, and the totalamount owed.After receiving the statement, the cardholder may dispute any chargesthat he or she thinks are incorrect . Otherwise, the cardholder must paya defined minimum proportion of the bill by a due date, or may chooseto pay a higher amount up to the entire amount owed.The credit issuer charges interest on the amount owed if the balanceis not paid in full (typically at a much higher rate than most other formsof debt).In addition, if the credit card user fails to make at least the minimumpayment by the due date, the issuer may impose a "late fee" and/orother penalties on the user.To help mitigate this, some financial institutions can arrange forautomatic payments to be deducted from the users bank accounts, thusavoiding such penalties altogether as long as the cardholder hassufficient funds.
Benefits to customersThe main benefit to each customer is convenience.Compared to debit cards and cheques, a credit card allows small short-term loans to be quickly made to a customer who need not calculate abalance remaining before every transaction, provided the total charges donot exceed the maximum credit line for the card.Credit cards also provide more fraud protection than debit cards. In theUK for example, the bank is jointly liable with the merchant for purchases ofdefective products over £100.Many credit cards offer rewards and benefits packages, such as offeringenhanced product warranties at no cost, free loss/damage coverage on newpurchases, various insurance protections, for example, rental car insurance,common carrier accident protection, travel medical insurance. Credit cards can also offer reward points which may be redeemed forcash, products, or airline tickets.
Parties involved1. Cardholder: The holder of the card used to make a purchase; the consumer.2. Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case. Cards issued by banks to cardholders in a different country are known as offshore credit cards.3. Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.4. Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.
5. Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.6. Merchant account: This could refer to the acquiring bank or theindependent sales organization, but in general is the organization thatthe merchant deals with.7. Credit Card association: An association of card-issuing banks suchas Discover, Visa, MasterCard, American Express, etc. that settransaction terms for merchants, card-issuing banks, and acquiringbanks.8. Affinity partner: Some institutions lend their names to an issuer toattract customers that have a strong relationship with that institution,and get paid a fee or a percentage of the balance for each card issuedusing their name. Examples of typical affinity partners are sportsteams, universities, charities, professional organizations, and majorretailers.
Insurance providers: Insurers underwriting various insurance protectionsoffered as credit card perks, for example, Car Rental Insurance, PurchaseSecurity, Hotel Burglary Insurance, Travel Medical Protection etc.Transaction network: The system that implements the mechanics of theelectronic transactions. May be operated by an independent company,and one company may operate multiple networks.
Secured credit cards• A secured credit card is a type of credit card secured by a depositaccount owned by the cardholder.• Typically, the cardholder must deposit between 100% and 200% ofthe total amount of credit desired. Thus if the cardholder puts down$1000, they will be given credit in the range of $500–$1000.• In some cases, credit card issuers will offer incentives even on theirsecured card portfolios. In these cases, the deposit required may besignificantly less than the required credit limit, and can be as low as10% of the desired credit limit. This deposit is held in aspecial savings account.•Credit card issuers offer this because they have noticed thatdelinquencies were notably reduced when the customer perceivessomething to lose if the balance is not repaid.
A prepaid credit card is not a true credit card, since no credit is offered bythe card issuer: the card-holder spends money which has been "stored" via aprior deposit by the card-holder or someone else, such as a parent oremployer.• It carries a credit-card brand(Discover, Visa, MasterCard, American Expressetc.) and can be used in similar ways just as though it were a regular creditcard.•Unlike debit cards, prepaid credit cards generally do not require a PIN.•After purchasing the card, the cardholder loads the account with any amountof money, up to the predetermined card limit and then uses the card to makepurchases the same way as a typical credit card.•Prepaid cards can be issued to minors (above 13) since there is no credit lineinvolved.•The main advantage over secured credit cards (see above section) is that youare not required to come up with $500 or more to open an account. Withprepaid credit cards purchasers are not charged any interest but are oftencharged a purchasing fee plus monthly fees after an arbitrary time period.
Fees charged to customersThe major fees are for:1. Late payments or overdue payments2. Charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake), called over-limit fees3. Returned cheque fees or payment processing fees (e.g. phone payment fee)4. Cash advances and convenience cheques (often 3% of the amount)5. Transactions in a foreign currency (as much as 3% of the amount). A few financial institutions do not charge a fee for this.6. Membership fees (annual or monthly), sometimes a percentage of the credit limit.7. Exchange rate loading fees (sometimes these might not be reported on the customers statement, even when applied).8. Over limit charges.