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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 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
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 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 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.
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. 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 credit
card 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.
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 creditcard 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 creidit 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.
Most Used American Credit Card
1. Mastercard
2. Visa
3. Citi
4. Discover
Credit card organizations
* American Express
* Citi
* Diners Club
* Discover
* JCB
* MasterCard
• VISA
Card
Collectible credit cards
A growing field of numismatics (study of money), or more specifically
Exonumia (study of money-like objects), creditcard 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.
Early credit cards were made of celluloid, then metal and
fibre, then paper and are now mostly plastic.
See also
• Charge
Card
* Credit card debt
* Credit history
* Credit score
• Debit
Card
* Electronic money
* Loan
* Stored-value card
* Credit card fraud
Categories: Payment systems | Electronic commerce
Common typo errors:
credti, creidit, credi, credt, cerdit, crad, creditcard
This
article is licensed under the GNU
Free Documentation License.
It uses material from the Wikipedia
article "Credit Card".
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