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Ad text: all loans (including “cash advances” through automated teller machines). Credit card issuers receive revenue from fees paid by stores that accept their cards and by consumers that use the cards, and from interest charged consumers on unpaid balances. Diners Club became the first credit card company in 1950, when it issued a card allowing members to charge meals at 27 New York City restaurants. In 1958, Bank of America issued the BankAmericard (now Visa), the first bank credit card. In 1965, only 5 million cards were in circulation; by 1996, U.S. consumers had nearly 1.4 billion cards, which they used to charge $991 billion in goods annually. The growth of credit cards has had an enormous impact on the economy—changing buying habits by making it much easier for consumers to finance purchases and by lowering savings rates (because consumers do not need to save money for larger purchases). Oil companies, car makers, and retailers have also used the cards to market their goods and services, using credit as a way of encouraging consumers to buy. Concern has been voiced over widespread distribution of bank credit cards to consumers who may not be able to pay their bills; costly losses and theft of cards; inaccurate (and damaging) credit records; high interest rates on unpaid balances; and excessive encouragement of consumer debt that has cut savings in the United States. Technology advances have facilitated the use of credit cards. Merchants are now connected to banks by modem, so purchases are approved rapidly; on-line shopping on the Internet is possible with credit card payment. Credit card companies are also experimenting with smart cards that would act like a small computer, storing account and other information necessary for its use. An alternative to credit cards is the debit card, which is used to deduct the price of goods and service directly from customers' bank balances. 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 credit card 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 they work: A credit card user is issued the card 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 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. 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 owing. 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 owing. The credit provider charges interest on the amount owing (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 card 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 card, 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 attract customers to their program. Secured credit cards: A secured credit card is a special type of credit card in which you must first put down a deposit between 100% and 150% of the total amount of credit you desire. Thus if the holder puts down $1500, he or she will be given credit in the range of $1000–$1500. 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 poor or no credit history. They are often offered to people 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 addition, some countries such as the United States limit the amount that a consumer can be held liable for fraudulent transactions, which shifts the liability to the merchant. This encourages the use of credit cards for electronic and mail order transactions, collectively called "card not present" transactions. For further security, some banks are offering one-time numbers for use in these transactions. They have spread far and wide beyond their initial market of the wealthy businessman and are now ubiquitous amongst the middle class of most Western countries. Security: The relatively low security of the credit card system presents many opportunities for fraud. However, this does not imply that the system is broken. The goal of the credit card companies is not to eliminate fraud, but to reduce it to manageable levels, such that the total cost of both fraud and fraud prevention is minimised. This implies that high-cost low-return fraud prevention measures will not be used if their cost exceeds the potential gains from fraud reduction. This opportunity for fraud has created a black market in stolen credit card numbers, which must generally be used quickly before the cards are reported stolen. Three improvements to card security are being introduced to the more common credit card networks at the time of writing. 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. 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: * The fee charged to the merchant that accepts the credit card. The merchant pays a 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 goes to the issuing bank, but parts of it go to the electronic data network, the card brand (Visa, MasterCard, etc.), and others involved in processing the ransaction. * 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"). Those who pay in full (pay the entire balance) do not. Interest charges vary widely; there are "teaser" rates that are 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 20 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 North Dakota that have less restrictive regulations. * 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); and (4) transactions in a foreign currency (as much as 3 percent of the amount; a few financial institutions charge no fee for this). 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.
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