The Double-Edged Sword: Benefits, Risks, and Controversies of Credit Cards

A credit card (or charge card) is a payment card that a bank issues, and it enables the users of the cards to buy goods or services or withdraw cash, on credit. By using the card therefore creates debt which has to be paid up later. Credit cards are one of most widely used settings of payment in the globe.

A regular credit card is in contrast to a charge card that requires balance to be repaid in full each month, or at the end of each statement cycle. In contrast, credit cards enable loans between consumers (where a continuing balance of debt is built up by the consumer) to which interest is charged on a specific basis. A credit card also differs from a charge card in that a charge card is generally a third-party entity, which would pay the seller, and be reimbursed by its buyer, whereas a credit card simply defers payment by the buyer until some later date. A credit card is also not like the debit card, which can be used like currency by the owner of the card. Also see MyCCPay – Login to Pay Credit Card Bill at Www.MyCCPay.Com.

As of June of 2018, there are 7.753 billion credit cards in the world. In 2020, there were a total of 1.09 billion credit cards in circulation in the United States and 72.5% of adults (187.3 million) in the country had at least one credit card.

Technical Specifications

Front of a Standard Credit Card

An example of the front that we have in a normal credit card:

• Issuing bank logo
• EMV chip (only on “smart cards”)
• Hologram
• Card number
• Card network logo
• Expiration date
• Card holder name
• EMV Contactless indicator

Backside of a Standard Credit Card

An example of the backside of a normal credit card:

• Magnetic stripe
• Signature strip
• Card security code

The size of most credit cards are 85.60 by 53.98 millimetres (3+3/8 in x 2+1/8 in) and rounded corners with a radius of 2.88-3.48 millimetres (9/80-11/80 in) conforming to the ISO/IEC 7810 ID-1 standard, which is the same size of ATM cards and other payment cards such as debit cards. Credit cards are made out of plastic but some are made out of metal.

Credit cards have a bank card number printed or embossed on them which complies with the ISO/IEC 7812 numbering standard. The prefix of the card number is known as the Bank Identification Number (BIN) which is the set of the first digits within the card number that identify the bank to which a credit card number belongs. This is the first six digits with the MasterCard and Visa card. The following 9 digits those are the individual account number. and last digit is validity check digits.

Both of these standards are sustained and are further developed by ISO / IEC JTC 1 / SC 17 / WG 1. Credit cards have a magnetic stripe fitting the ISO/EC 7813. Most modern credit cards employ smart card technology: they consist of a computer chip embedded in them as a security measure. In addition, complex smart cards in which peripherals such as a keypad, a display or a fingerprint sensor are used increasingly on credit cards.

In addition to the main credit card number, credit cards also share some issue and expiration dates (given to the nearest month) and some extra numbers such as issue number and security code. Complex smart cards allow to have a variable security code hence increasing security for the online transactions. Not all credit card has the same sets of extra codes and not all of them use the same number of digits.

Credit card numbers and cardholder’s names were originally embossed, to enable easy transfer of such information to charge slips printed on carbon paper forms. With the disappearance of paper slips, some credit cards are actually not embossed and in fact the card number is no longer in the front. In addition, some of the cards are now in a vertical design (in lieu of horizontal).

Early Charge Coins and Cards

Beginning in the late 19th century, the charge cards varied in different shapes and sizes. that it was made of celluloid, copper, aluminum, steel and other kinds of whitish metals. Some had the shape of coins with a little hole allowing it to be put in a key ring. Those with charge coins had often been used to give to customers with charge accounts at a hotel or department store. Every one of them had one charge account number to go with the name and logo from the merchant.

The charge coin offered an easy and fast way to transfer the charge account number on sales slip by printing the coin in the sales slip. The Charga-Plate was a precursor of the credit card and was used in the US between the 1930s and late-1950s. It was a 2+1/2 by 1+1/4 inches (64 mm by 32 mm) rectangle of sheet metal in relation with the addressograph and military dog tag systems. It was also embossed in the name and name, city and state of the customer. On the back of it was affixed a small paper card for the signature. In making a purchase the plate was placed in a recess in the imprinter with a paper ‘charge slip’ on top of it. The record of the transaction contained an impression of the embossed information taken by the imprinter pressing an inked ribbon on the charge slip. Charga-Plate was a trademark of the Farrington Manufacturing Co. Charga-Plates were issued by large scale merchants to their regular customers, much like the credit cards of department stores a few years later. In some instances instead of the customers holding the plates in their store the plates were held in the issuing store. When set to the page of an authorized user made a purchase, a clerk acquired the plate from the files of the store, and then he or she engaged in making the purchase. Charga-Plates increased the speed in the back-office bookkeepers and lower the amount of manual copying mistakes.

Air Travel Card

In 1934 American Airlines and the Air Transport Association made this process still easier with the inception of the Air Travel Card. They created a numbering scheme to identify the company making the card as well as the customer account with the credit card information. This explained why the modern days UATP cards are still started with the number 1. With an Air Travel Card passengers were able to “buy now, and pay later” on a ticket against their credit with a fifteen percent discount at any of the accepting airlines. By the 1940s all major US airlines had Air Travel Cards which could be used with 17 different companies. By 1941, some half of the revenues of the airlines was conducted through the Air Travel Card agreement. The airlines had also begun to introduce the installment plans to attract new travellers into the air. In 1948, The Air Travel Card was the first internationally valid charge card out of all the members of the International Air Transport Association.

Experimentation in General Purpose Charge Cards

The concept of letting customers pay diverse merchants on the same card was advanced ahead in 1950 by the founders of Diners Club, Ralph Schneider, Frank McNamara, to consolidate a number of cards. The Diners Club (which was created in part as a result of a merger with Dine and Sign), created the first “general purpose” charge card required the entire way of making payments with every statement. That was followed by Carte Blanche and in 1958 by American Express that had created a worldwide credit card network (although these were at first charge cards that gained credit card functions later).

BankAmericard, Master Charge

Until 1958, no one had been able to successfully establish a revolving credit financial system, in which a card issues by a third party bank was being generally accepted by a large number of merchants, as opposed to merchant-issued revolving cards in which were accepted by a small selection of merchants. There had been a dozen attempts by small American banks but these were all short lived. In 1958, Bank of America introduced the BankAmericard that launched in Fresno, California, the first successful recognizably modern credit card. This type of card managed to be where others had failed because it broke the case of the chicken and the egg scenario where consumers didn’t want to use a card that few merchants would accept and the merchants didn’t want to accept a card that few consumers would use. Bank of America had choose Fresno because 45% of its resident either used the bank and with bank sending card 60000 Fresno resident at same time with the merchant to convince take card. It was, eventually, licensed off to other banks around the United States, and then around the world, and in 1976, all BankAmericard licensees united themselves under a common brand Visa. The ancestor of MasterCard was born in 1966 when a group of banks created a Master Charge to compete with BankAmericard, it was given an important boost when the Citibank merged the own Everything Card which was launched in 1967 to MasterCharge in 1969.

Early credit cards in the U.S. of which BankAmericard was the largest example were mass produced and mass mailed unsolicited to bank customers considered to be low risk. According to LIFE, cards were “mailed off to unemployable people, drunks, narcotics addicts and to compulsive debtors” which was the comparison of “giving sugar to diabetics” by Betty Furness, President Johnson’s Special Assistant. These mass mailings were known as “drops” in banking terminology, and was outlawed in 1970 because of the mass chaos that they caused in the financial world. However, by the time the law took effect, about 100 million credit cards were floated into the population of the US. After the year 1970, only credit card applications could be sent unsolicited in the mass mailings.

This system was computerized in 1973 through the leadership of Dee Hock, the first CEO of Visa because of the need for less time for transaction. However, until always connected payment terminals became ubiquitous at the beginning of the 21st century many merchants would enable all charges, especially those below a value threshold or from known and trusted customers, to be passed without check by phone. Books containing lists of stolen card numbers were placed in the possession of the merchants, who were in any case expected to check cards against the list before accepting them, as well as comparing the signature on charge slip to that on the card. Merchants that didn’t take the time to undertake the right procedures of verification were liable for the fraudulent charges, but since the procedures were cumbersome, merchants often avoided some or all of them and took the risk for smaller transactions.

The early history of the credit card industry in the US was dominated by regional monopolies. A number of landmark anti-trust court cases such as the 1978 Supreme Court case Marquette National Bank of Minneapolis v. First and foremost was Omaha Service Corp., which brought about significant changes of the credit card industry to make it more competitive. Competitive reforms of this kind were found in a study in 2024 to have caused large welfare gains in particular for the poor.

Outside of North America

The patchwork nature of the U.S. banking system regulation under the Glass-Steagall Act made the usage of credit cards a useful practice for those who were travelling around the country and moving their money to places where they could not directly benefit from 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 and store cards. In 1966, Barclaycard card was launched in the United Kingdom, which was the first credit card launched outside the United States.

Although the adoption of credit cards reached very high levels in the U.S., Canada, the U.K., Australia, and New Zealand in the latter 20th cent., many cultures were more oriented to cash, or developed other forms of cashless payments, such as Carte bleue or the Eurocard (Germany, France, Switzerland, and others). In these places credit cards were first adopted much slower. Due to strict regulations concerning bank overdrafts, some countries, France in particular, were much quicker to develop and adopt the use of chip based credit cards which are seen as major anti-fraud credit devices. Debit cards, online banking, ATM, mobile and instalment are utilized on a greater level than credit cards in certain countries. It wasn’t until the 1990s that it had anything resembling the percentage market penetration levels that it’s got in the U.S., Canada, and U.K. In some countries, acceptance still remains low as use of a credit card system depends on the banking system of each country, whereas in others, a country sometimes need to develop its own credit card network, ie bank of U.K namely Barclay card and Australia named Bankcard. Japan remains a very cash-oriented society with Credit Card adoption being limited mainly to the largest of merchants, despite the use of stored value cards (such as telephone cards) as an alternative currency, the trend is for the use of an RFID based systems inside of cards, cellphones and other objects.

Design and Vintage Credit Card as Collectibles

The creation of the credit card itself has become a major selling point. A growing field of numismatics (study of money), or more specifically exonumia (study of money-like objects), credit card collectors strive to collect the various incarnations of credit from the now familiar plastic cards to old-fashioned paper merchant cards, and even metal tokens accepted as merchant credit cards. Early credit cards were made of celluloid plastic, then metal and fiber plus on paper and now mostly polyvinyl chloride (PVC) plastic. However, the chip part of the credit cards is made from the metals.

Cash Advance

A cash advance is a credit card transaction that results in the withdrawal of cash, as opposed to the purchase of something. The process can be either through ATM or over the counter at Bank or other finance agency to a certain limit, in case of credit card it will be the credit limit (or some percentage of it). Cash advances will typically come with a charge of 3%-5% of what one will be borrowing. The interest, when made on a credit card, is often higher than the other credit card transactions. Clients want to know how they are going to be charged interest is accrued everyday from the day that the cash is borrowed.

Credit-card purchases of items that are considered cash are sometimes considered cash advances in line with the guidelines of the credit card network, and hence are subject to the higher interest rate, and the non-existence of the grace period. These often include money orders, prepayment of debit cards, lottery tickets and gaming chips, mobile payments and some taxes and fees paid to some governments. However, if the merchant does not reveal the true nature of the transactions, these transactions will be made as ordinary credit card transactions. Many merchants have passed on the credit card processing fees to the credit card holders in spite of the credit card network’s guidelines, which states the credit card holders should not have any extra fee for doing a transaction with a credit card.

Under card scheme rules, a person who holds a credit card and presents an accepted form of identification must be granted a cash advance over the counter at any bank that has issued that type of credit card, even if it is impossible to provide the PIN of the credit card holder.

A Japanese law which allowed credit card cash back went into force in 2010. However, there was a legal loophole in this system which was quickly exploited by online shops that were into the business of providing cash back to customers as a form of easy loan which charged exorbitant rates. Once the online store is initially set up selling one low-cost product of glass marble, golf tee or eraser with a transmitting 80,000 yen via wire transfer payment for 100,000 yen (1,200 US dollar) with a credit card. A month later when the credit card provider charges the card owner with full fee, the online store is out of the picture with zero liability. So, what the Online cash back services offer is that of 300 per cents of annual interest loan. Hideki Fukuba, who is the first operator of such online cash back service, was the first person to be charged by the police on 19 October 2010. He was charged on tax evasions of 40 million yen in unpaid taxes.

Usage

Visa, Mastercard and American Express are card issuing entities that establish terms of transactions for merchants, card issuing banks and acquiring banks.

A credit card issuer (such as a bank or credit union) makes agreements with merchants for them to accept its credit cards. Merchants frequently advertise in their signage or other company material which cards they accept by displaying the acceptance marks which generally is based on logos. Alternatively this can be communicated, for example, through the menu of a restaurant or by word of mouth or, stating, “We don’t take credit cards”.

The credit card issuer extends a credit card to a customer at the time or subsequent to an account being approved by the credit provider which may or may not be the same entity as the card issuer. The cardholders can then use it to purchase from merchants that accept that card. When a purchase is made the cardholder agrees to pay the card issuer. Cardholder shows consent to pay by signing a receipt with a record of the card details and amount to be paid/enter personal identification number (PIN). Also, many merchants now accept verbal authorizations by telephone and electronic authorization utilizing the Internet, and this is known as a card-not-present transaction.

Using electronic verification systems, merchants can verify within a few seconds that the card is good and that the cardholder has enough credit to cover the purchase, which the verification would take place at the point of purchase. The verification is done through a credit card payment terminal or point-of-sale system which has a communications connection to the merchant’s acquiring bank. Data from the card is retrieved from a magnetic stripe or chip on the card; the latter system is referred to as chip and PIN in the United Kingdom and Ireland, and is implemented in the form of an EMV card.

For card-not-present transactions in which the card is not presented (e.g. e-commerce, mail order, and telephone sales), merchants further ensure that the customer is in physical possession of the card and is the person authorized to use it by requesting other information such as the security code printed on the back of the card, date of expiry and billing address.

Each month, the cardholder receives a statement of the purchases made using the card, any outstanding fees, the total due and minimum payment due. In the US, after receiving the statement, the cardholder is able to dispute any charges that are believed to be incorrect (see 15 U.S.C. SS 1643, which limits liability of the cardholder for unauthorized use of a credit card to $50). The Fair Credit Billing Act provides details of the laws in the US.

Many banks are now also providing option of electronic statements either in lieu of or with the physical statement which can be viewed at any time by the cardholder through the online banking website of the issuer. Notification about the availability of a new statement is usually on the cardholder’s email address. If the card issuer has chosen to allow it, then there may be other means of payment the card holder can use instead of a physical check as an electronic transfer of funds from a checking account. Depending on the issuer, the cardholder may also be able to make multiple payments during a single statement period, which may help them to take advantage of the credit limit on the card multiple times.

Limit

A credit limit is the maximum revolving credit which is available on a particular lender during a credit card or line of credit. Credit card issuers will typically make several different considerations when determining the limit on their credit cards, and the main factors considered include the applicant’s credit score, their income level and current debt obligations. The credit limit has a direct effect on the purchasing power of the cardholder as well as the credit utilization ratio.

Most major card issuers implement tiered limit structures as determined by creditworthiness – credit score above 740 FICO can potentially result in credit limits exceeding $10,000 – credit score below 670 FICO will often result in starting credit limits of between $300 – $1,000. Issuers usually review the accounts periodically and offer increases to the credit line to cardholders automatically if it is proven that they are using the credit responsibly by making on-time payments and keep the utilization below 30%. Federal Reserve data from 2022 shows the correlation between credit score and credit score limit. Following this, there are various types of borrowers: – prime borrower (FICO 680 – 739) their median credit score limit was $7,100 whereas – subprime borrower (FICO under 620) their median lower credit score limit was $1,500.

The collective amount of credit line capacity on all credit cards in the United States exceeded $5 trillion in 2022, with prime and super prime borrowers representing some 80% of available credit.

Minimum Payment

The cardholder must make a specified minimum payment on the total amount due until a certain date or he/she may opt to pay a larger amount. The issuer of the credit charges interest on the unpaid balance if the sum that was charged is not paid in full (usually at a much higher percentage than most other forms of debt). This impact is approximately 8% of all the interest that has ever been paid. Thus, the option to make minimum payments for the automatic and manual payments may be hidden and more focus should be placed on the total debt to avoid the unwanted consequences of defaulting on minimum payments. In addition, if the Cardholder does not make at least the minimum payment by the due date, the issuer may charge a late fee or other penalties. To help mitigate against this some financial institutions can arrange for automatic payments to be deducted from the cardholder’s bank account thus avoiding such penalties altogether, of course so long as the cardholder has sufficient funds.

In cases where the minimum payment is less than the finance charges and fees assessed during the billing cycle; there will be an increase in the outstanding balance in what is called negative amortization. This practice tends to increase risk on the credit and to mask the quality of the lender’s portfolio and consequently has been banned in the U.S. since 2003.

Advertising, Solicitation, Application for and Approval

Credit card advertising regulations for the U.S. are as follows: the Schumer box disclosure requirements. A great percentage of junk mail is made up of the credit card offers generated from lists supplied by the large credit reporting agencies. In the United States, the three major U.S. credit bureaus (Equifax, TransUnion and Experian) have an opt out of receiving such offers from credit card solicitation through their Opt Out Pre Screen program.

Interest Charges

Credit card issuers normally waive interest charges as long as the balance is paid in full each month, but normally will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.

For instance, if a user owed a $1,000 transaction and fully paid off the balance during this grace period, then he would not be charged interest on the transaction. If, however, even 1$1.00 of the total amount did not pay, interest was charged on the $1,000 from the date of the purchase until payment is made. The exact way in which an interest is charged will typically be included in a cardholder agreement which may be summarized on the back of the monthly statement. The general formula of calculation as used by most financial institutions for determining the rate of interest to be charged is (APR/100 x ADB) /365 x number of days revolved. Take the annual percentage rate (APR) and divide by 100 then multiplied to amount of the average daily balance (ADB). Then divide the result by 365 and then take this total and multiply it by the total amount of days the amount revolved before being paid for on the account. Financial institutions call interest charged back to the time for which the retail transaction was made and up to the point a payment was made, if not in full, a residual retail finance charge (RRFC). Thus after an amount has revolved and a payment has been made the user of the card will still get interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the balance stopped revolving).

The credit card may simply be a type of revolving credit, or it may turn into a complicated financial instrument with multiple segments of balance each at a different interest rate, perhaps with one umbrella credit limit, or there may be separate credit limits which apply to the different segments of balance. Usually, this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. If a number of different interest rates apply to different segments of balance, then payment allocation is generally left up to the issuing bank, and payments will thus usually be made towards the lowest rate balances before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card and the interest rate on a particular card could jump dramatically if the card user is late making a payment on that card or one of the other credit instruments or even if the issuing bank decided to raise its revenue.

Grace Period

A credit card’s grace period refers to the time the cardholder has to pay the credit card bill before an interest is calculated on the outstanding balance. Grace periods may differ but usually are anywhere from 20 to 55 days depending on the kind of credit card and who is the issuing bank. By some of the policies, there may be reintroduction after certain conditions. Most of the time if a cardholder forgets to pay the balance finance charges will be calculated and the grace period will not apply. Finance charges incurred depend on the grace period and balance and with most credit cards there is no grace period provided if there is any outstanding balance from the last billing cycle or statement (i.e. interest is applied on both previous balance and new transactions). However, there are some credit cards that will not apply the finance charges to new transactions and will only apply it on the previous or old balance.

Parties Involved

• Cardholder: The individual who has the card which he/she uses to make the purchase; the consumer. Does not charge fraudulent charges on the US credit cards.
• Card-issuing bank: The financial professional or other establishing that issued the credit card to the cardowner. This bank charges the consumer to repay it and runs the risk that the consumer uses the card fraudulently. American Express and Discover used to be the only card-issuing banks for their brands of cards, however as of 2007 this is no longer the case. Cards issued by banks to cardholders by another country are called offshore credit cards. In the US, credit card companies are not required to notify cardholders when they close any credit card, including cards with balances.
• Merchant: The business/or individual accepting credit card payments on products or services provided to the cardholder.
• Acquiring bank: The bank which is accepting payment for the products or services on behalf of the merchant.
• Independent sales organization: re-sellers (to merchants) of the services of the acquiring bank.
• Merchant account: This could be referring to the acquiring bank or the independent sales organization but in general is the organization with whom the merchant does business.
• Card association: An association of card issuing banks like Discover, Visa, MasterCard, American Express which determine the terms of conducting transactions for merchants, card issuing banks and acquiring banks.
• Transaction network: The system that is implementing the mechanics of the electronic transaction. May be operated by a company that is independent and one company can operate a number of networks.
• Affinity partner: Some institutions lend their names to an issuer in order to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of common types of affinity partners include sports teams, universities, charities, professional organizations and big box retailers.
• Insurance providers The insurance providers providing insurance protections offered as perks by credit cards; for instance, Car Rental Insurance, Purchase Security, Hotel Burglary Insurance, and Travel Medical Protection.

The flow of information and money between these parties, which always comes through the card associations, is known as the interchange, and it consists of a few steps.

Transaction Steps

1. Authorization: The cardholder offers the card for payment to the merchant and the merchant submits his transaction to the acquirer (acquiring bank). The acquirer verifies the credit card number, the type and amount of transaction with the issuer (card-issuing bank) and holds (that is, reserves) that loyalty amount of the cardholder’s credit limit for the merchant. An authorization will produce an approval code and the merchant saves this together with the transaction.
2. Batching: Authorized transactions are batched up in “batches” which are sent to the acquirer. Batches are usually submitted once a day towards the end of the business day. Batching may be manual (triggered by the action of the merchant) or automatical (according to a pre-determined schedule, on the basis of a payment processing platform). If a transaction is not submitted in the batch, the authorization will remain until a period of time varies with the issuer after which the amount held will be released to the cardholder’s available credit (see authorization hold). Some transactions may be submitted in the batch without such prior authorisations, these are either transactions falling under the floor limit of the merchant, or they were transactions where the authorisation was unsuccessful but in which the merchant still attempted to force the transaction through. (Such may be the case where the cardholder does not accompany her but does owe the merchant extra money, for example, extended stay at the hotel or car rental.)
3. Clearing and settlement: The acquirer sends the batch transactions in the credit card association whose liability is to debit the issuers for payment and to credit the acquirer. Basically, the issuer pays the acquirer for the transaction.
4. Funding: After extracting the acquirer has been paid the acquirer pays the merchant. The merchant receives the amount that is the sum of the money in the batch less the “discount rate”, “mid-qualified rate” or “non-qualified rate” that are tiers of fees the merchant pays the acquirer for processing the transactions.
5. Chargebacks: A chargeback is an event in which money in merchant account is held due to a dispute relating to the transaction. Chargebacks are normally initiated by the cardholder. In the event of chargeback, the transaction is sent back to the acquirer by the issuer to process the issue. The acquirer then sends the chargeback to the merchant, who has the option of accepting the chargeback or challenging the chargeback.

Credit Card Register

A credit card register is a transaction register used to make sure the growing amount of money they owe from using a credit card is a sufficient lesser amount than the credit limit to prepare accounts for authorization holds and payments not yet made to them, and easily look up past transactions for reconciliation and budgeting purposes.

The register is a personal account of banking transactions used for the credit card purchases as it affects funds in the bank account or the available credit. In addition to the code column checking numbers so forth indicates the credit card. The balance column is available money after making purchases. When the credit card payment is made it’s already seen in the balance that the funds were spent. In the case of the entry in a credit card, an entry for a deposit column is the credit card available and an entry for a payment column is the total amount due for the credit card, their sum gives the limit of credit.

Each check and debit card transaction, and withdrawal of cash and credit card charges are manually entered into the paper register on a daily or several times per week basis. Credit card register is also used in reference to one record of transaction of each credit card In this case, easily, the booklets allow the location of the amount of credit currently available on a card when there are ten or more cards being used.

Specialized Types

Business Credit Cards

Business credit cards are one of such cases special credit cards which are issued in the name of a registered business and usually they can only be used for business purposes. The use of them has increased in recent decades. In 1998, for example, 37% of small businesses noted that they had a business credit card; by 2009 the figure had risen to 64%.

Business Credit cards have a number of features dedicated to businesses. They often have special rewards in such places as shipping, office supplies, travel and business technological. Most of the issuers take the credit score of the applicant on an individual level when considering these applications. In addition, there is potential for income to result from a variety of sources in order to qualify, which makes it possible that these cards will be available to new businesses. In addition, some of the companies that issue this type of card do not report the account holder’s activity to the owner’s personal credit, or only report to the owner’s personal credit if the account is delinquent. In these cases, the activity of the business is separated from the personal activity of the owner’s credit.

Business credit cards are available through American Express, Discover, and virtually all vendors of Visa and Master Card cards. Some local banks and credit unions also sell business credit cards.

Secured Credit Cards

A secured credit card is the type of credit card that is backed by a deposit account owned by a credit card holder. Normally, the cardholder has to deposit between 100% and 200% of the total value of credit that they want. Thus were the cardholder put down $1,000 he or she would be given credit in the range of $500-1,000. In some cases, credit card companies will even offer incentives in their secured credit card portfolio. In these cases, the amount of the deposit required may be much lower than the amount of the required credit limit, and can be as small as 10% of the desired credit limit. This deposit is kept under a special savings account. Credit card issuers have this because they have observed that delinquencies were quite less when the customer feels that they have something to lose if they do not repay their balance.

The cardholder of a secured credit card will need to make regular payments as they would with a regular credit card, but should they default on a payment, the card issuer has the option of recouping the cost of the purchases made with the merchants out of the deposit. The benefit of the secured card is that individuals with either negative or no credit history can take advantage of the security they offer as most companies report regularly to the major credit bureaus. This enables the cardholder to begin creating (or re-creating) a good credit history.

Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, either the deposit will not be debited for simply missing one or two payments. Usually, the use of the deposit as an offset is only made when the account is closed, at the request of the customer himselfillar account or as a result of grave delinquency (150 to 180 days). This means that an account that is less than 150 days delinquent will still be accruing interest and fees and could cause a balance to be much higher than the actual credit limit on the card. In such cases, the total of the debt may be much more than the original deposit and the cardholder not only loses their deposit but is left with additional debt.

Most of these conditions are commonly explained in a cardholder agreement which is signed by the cardholder when the cardholder opens an account.

Secured credit cards are an option to enable an individual with a poor credit history or no credit history to have a credit card that may not otherwise be available. They will often be offered as a way of rebuilding one’s credit. Fees and service charges for secured credit cards; in this case, the fees and service charges are often higher than those charged for normal non-secured credit cards. 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 are almost always more expensive than unsecured credit cards.

Sometimes a credit card will be secured by the equity in the homes of the borrower.

Prepaid Cards

They are sometimes mentioned as “prepaid credit card“, but are a debit card (prepaid card or prepaid debit card), since no credit is offered by the card issuer: the cardholder spends money which had previously been “stored” via a prior deposit by the cardholder or someone else. However, it is branded with a credit card (such as Discover, Visa, MasterCard, American Express, or JCB) and can be used in similar ways to the extent it is just like using a credit card. Unlike debit cards, prepaid credit cards will generally not require a PIN. An exception are a prepaid credit card with an emv chip which requires a PIN if the method of payment is processed with the Chip and PIN technology. As of 2018, prepaid cards were the leading type of debit card in the U.S. (71.7%).

After buying the card, the card-holder loads the account with any amount of money, up to the predetermined card limit and uses the card to make purchases daily just like the typical credit card. The major benefit over secured credit cards (see above section), in that the cardholder is not required to provide the money needed to open an account. With prepaid credit cards, there is no interest charged to the purchasers but a lot of down-payment costs and monthly fees charged after the artificial time period along with a lot of other costs.

Prepaid credit cards have sometimes been sold to teenagers to buy online purchases without your parents processing payment. Teenagers can only use money available on the card which helps encourage financial management to prevent the risks of debt problems later on in life.

The prepaid cards are available to use internationally. The use of the prepaid card is convenient to the payees in countries where international wire transfers and bank checks are time consuming, complicated and expensive.

Because of numerous fees associated with the obtaining and use of credit-card branded prepaid cards, the Financial Consumer Agency of Canada refers to these products as “an expensive way to spend your own money”. The agency has published a booklet called Pre-paid Cards discussing the merits and demerits of this type of prepaid cards.

Digital Cards

A digital card is a digital representation on the cloud of any type of identification card or payment card, such as a credit card.

Charge Cards

A charge card is a form of credit card.

Benefits and Drawbacks

Benefits to Cardholder

The ultimate advantage to the cardholder is convenience. Compared to debit cards and checks, in contrast, a credit card has enabled small short-term loans for the credit card company to rapidly make small amounts of money to a cardholder who does not need to calculate a balance remaining prior to every transaction as long as the total charges do not exceed the maximum credit line for the credit card. One of the financial advantages is that no interest is charged on a balance which is paid in full within the grace period. In the United States, most credit cards either have a grace period (ex. 21, 23 or 25 days) on purchase transactions. Different nations provide different degrees of protection. In the U.K., for instance, the bank suffers jointly with the merchant for purchases of defective products of more than PS100. Many credit cards provide the cardholder with benefits. Some benefits are available on products bought using the card, such as extended warranties on products, reimbursement for drops in prices immediately after purchase (price protection), reimbursement for theft or damage on recently purchased products (purchase protection). Other benefits include different types of travel insurance such as insurance for rental cars, travel accidents, baggage delays, trip delays or cancellation, etc.

Credit cards may also come with a loyalty program, in which each purchase is rewarded according to the price of the purchase. Usually, the form of rewards takes the form of cashback or points. Points can usually be exchanged for gift cards, products or travel costs (such as airline tickets). Some credit cards offer the option of transfer of accrued points to hotel/airline’s loyalty programs. Research has studied on whether competition between card networks may potentially cause the payment rewards to be too generous, at the expense of higher prices among merchants which may have actual repercussions on social welfare, and the way it is distributed, and may thus justify public policy interventions.

Some countries such as the United States, the United Kingdom, and France have regulations on the maximum amount of money for which a consumer can be found liable in case of fraudulent transactions with a lost card or a card stolen from someone.

Comparison of Credit Card Benefits in the US

The following table includes a list of benefits that is provided in the US pertaining to consumer credit cards in some of these networks. These benefits may differ for each credit card issuer.

Benefit	MasterCard	VISA	American Express	Discover
Return extension	60 days up to $250	90 days up to $250	90 days up to $300	Not Available
Extended warranty	2X original up to 1 year	Depends	1 more year 6 years max	–
Price protection	60 days	Varies	No	–
Loss/damage coverage	90 days	Depending	90 days up to $1,000	–
Rental car insurance	15 days Collision, theft, vandalism	15 days Collision, theft	30 days Collision, theft, vandalism	–

Detriments to Cardholders

High Interest Rate and Bankruptcy

Low introductory credit card rates are tied to a set period of time, typically 6 to 12 months, after which time, a higher rate is charged. As all credit cards incur fees and interest, some customers will feel so indebted to their credit card provider that they will go bankrupt. Some credit cards frequently will charge the rate of 20 to 30 percent after the payment is missed. In other cases, a fixed charge for no change in the interest rate is levied. In some cases universal default may apply: the high default rate may be applied to a card in good standing by missing a payment on an unrelated account from the same provider. This can result in a snowball effect whereby the consumer is submerged by high interest rates he or she did not anticipate. Further, most card holder agreements allow the issuer to increase the rate of interest however they see fit regardless of the reason. First Premier Bank at one point had credit card with 79.9% interest rate rate; however, they stopped this card in February 2011 due to consistent defaults.

Research indicates that a significant portion of consumers (around 40 percent) make a sub-optimal selection when it comes to taking on a credit card agreement, with some of them suffering hundreds of dollars in unnecessary interest charges.

Unnecessary Risk

Credit card ownership comes with more dangers attached (relative to other alternatives for cashless payments) including an elevated risk of fraud, or paying for unnecessary liability.

Weakens Self Regulation

Several research has found that consumers are likely to spend more money if they pay by credit card. Researchers postulate that when people make payment with credit cards, individuals do not feel abstract pain of payment. Furthermore, researchers have found that the use of credit cards could lead to increased consumption of unhealthy food, compared to the use of cash.

Detriments to Society

Inflated Pricing – To All Consumers

Merchants that accept credit cards are facing interchange fees and discount fees on all credit card transactions. In some cases the merchants are prohibited by their credit agreements from passing these fees on directly to the credit card customers, or the merchants may not charge a minimum transaction amount. The result is that the merchants are incented to charge all customers (including those who do not use credit cards) higher prices to cover the fees in credit cards transactions. The inducement can be strong since the merchant’s fee is a percentage of the price of sale, which has a disproportionate effect on the profitability of businesses that have mostly credit card transactions unless they are paid for by increasing prices generally. In the US in 2008 credit card companies received a total of $48 billion in interchange fees or an average of $427 per family at an average fee rate of about 2% per transaction.

Credit card rewards result in a transfer of $1,282 from the average cash payer to the average card payer in total, in a year.

Benefits to Merchants

For merchants, card-based purchase amounts eliminate resistance as compared to paying cash, and the transaction is usually more secure than other types of payments, such as by check, in that the issuing bank has made a commitment to pay the merchant the moment of transaction authorisation, whether the consumer defaults on the credit card payment (with the exception of legitimate disputes, which can lead to charges back to the merchant). Cards are even more secure than cash since they minimise the opportunity for theft because they reduce the cash on the premises. Finally, credit cards cut down the back office cost associated with processing the check/cash and transportation to the bank.

Prior to the use of credit cards, individual merchants had to be able to assess the credit history of each customer to conduct business with them. That task is now done by the banks which undertake the credit risk. Extra turnover is created by the fact that the customer does not have to be hindered by the magnitude of cash in his pocket or the immediate state of his bank balance in buying goods and services immediately. Much of the marketing of merchants is based on this immediacy. For every purchase, the bank charges the merchant a service commission (discount fee), there may be some delay before the agreed money is received by the merchant. The commission usually consists of a percentage of the transaction sum, and a fixed commission fee (interchange rate).

Costs to Merchants

Merchants are charged a number of fees for accepting credit cards. The merchant typically pays around 0.5 to 4 percent commission on the value of each transaction that is paid for in credit card. The merchant could also be charged a variable rate, known as merchant discount rate, for each transaction. In some cases of very low-value transactions, use of credit cards will greatly cut into the profit margin or the merchant will lose money on a transaction. Merchants that have a very low average transaction price or a very high average transaction price are averse to accepting credit cards. In some cases, the merchants may also charge the users for a “credit card supplement” (or surcharge) that is either flat charged or a percentage amount for the payment by credit cards. This practice was not allowed by most credit card contracts in the US until 2013 when a large-scale settlement between merchants and credit card companies enabled merchants to introduce surcharges. Most retailers have not even begun to use credit card surcharges, however, fearing that they lose customers.

Merchants in the United States have been battling what they view as absurdly high fees being charged by credit card companies in a series of lawsuits beginning in 2005. Merchants accused the two main credit card processing companies, MasterCard and Visa, of abusing their monopoly power, charging exorbitant fees in a class action suit between the National Retail Federation and some of the largest retailers including Wal-Mart. In December 2013 a federal judge approved a $5.7 billion settlement in the case that provided payouts to merchants who had paid credit card fees, the largest antitrust settlement in US history. Some large retailers, including Wal-Mart and Amazon, decided not to take part in this settlement, however, and have continued their legal battle against the credit card companies.

In April 2015 the EU had set a limit for the interchange fee of 0.3% on consumer credit cards, and 0.2% on debit cards.

Merchants also have to lease or purchase processing equipment, though some of the processors offer this equipment as well for free. Merchants are also required to meet data security compliance standards which are highly technical and complicated. In many cases, there is a delay of days in receiving the money in a merchant’s bank account. Credit card fee structures are very complicated, which put the smaller merchants at a disadvantage in analyzing and predicting fee.

Finally, the risk of getting consumers to charge back is assumed by merchants.

Security

Credit Card Fraud

Credit card security depends on the physical security of the plastic card in addition to the security of the credit card number privacy. Therefore, as long as the card or card number is within the reach of anyone other than the card owner, security is at risk. Once it was not unusual for merchants to accept credit card numbers without further checks for mail order buys. It is now common practice to only ship to confirmed addresses because it is a security measure to reduce fraudulent purchases. Some merchants will accept a credit card number for in-store purchases, in which case access to the number makes it easy to commit fraud, but lots demand the card itself as well as a signature (for magnetic stripe cards). A lost or stolen card can be cancelled and if done quickly will greatly limit the fraud that can take place in this way. European banks can force a cardholder to provide a security number (PIN) for purchases by a card in person.

The Payment Card Industry Data Security Standard (PCI DSS) is the security standard issued by Payment Card Industry Security Standards Council (PCI SSC). This data security standard is used by the acquiring banks to place cardholder data security requirements on their merchants.

The hope of the credit card companies is not to eliminate fraud, but to “reduce it to manageable levels”. This implies that fraud prevention measures will only be used where their cost is below the potential gains from fraud reduction, whilst a high cost low return measures will not be used – as expected from organizations where the goal is profit maximization.

Internet fraud may be perpetrated through false claims of a chargeback which are not justified (“friendly fraud“), fraud committed through the use of credit card information of which there are many ways to steal it (the simplest being copying information from retailers either online or offline). Despite attempts to increase security for remote purchases using credit cards, security breaches in most cases are the result of poor practice by merchants. For example, a website using a secure means of transmitting card data to the merchant using encryption (TLS), might then email the card data, unencrypted, from the webserver to the merchant; or the merchant may contain unencrypted information in an easily accessible format that can be accessed across the Internet or by a rogue employee; unencrypted card information is always a security risk. Even encrypted data may be cracked.

Controlled payment numbers (these are also called virtual credit cards or disposable credit cards) are another option for preventing credit card fraud where the presentation of a physical card is not required such as telephone and online purchasing. These are numbers for one-time use looking like a payment card, which are connected with the user’s real account but do not disclose its details, and cannot be used for further unauthorized money transactions. They can be valid for relatively short amount of time, and with a limit of the amount of the purchase or limit set by the user. Their usage can be restrict to one merchant. If the number given to the merchant is compromised, it will be refused if an attempt is made to use it one more time.

A similar system of controls can be used on cards in physical images. Banks can set a lot of controls on individual cards in accordance to what is needed; for instance, a card can be limited to some temporal, numerical and geographical usage controls. From a security perspective, this means that a customer can have a chip and PIN card secured to be used in the real world, and limited for use in the home country. Should the information on the cards be compromised, the thief will not be able to use it overseas in non-chip and pin EMV countries. Similarly, the real card can be restricted from the online process so that if this is attempted, the stolen details will be declined. Then when the card users are shopping online they could use virtual account numbers. In both circumstances, an alert system can be built in which notifies a user of a fraudulent attempt made that breaches their parameters as well as provide data on this in real-time.

As well the physical card has security features against counterfeiting. For instance, most current credit cards contain a watermark which will fluoresce under ultraviolet light. Most of major credit cards have hologram. A Visa card bears a letter V that is superimposed over the regular Visa logo and a MasterCard has the letters MC across the front of the card. Older Visa cards have a bald eagle or dove across the front while older MasterCard cards-have two circles (Venn diagram) with continents on it. In above mentioned cases, the security features are visible only under ultraviolet light, and are invisible under normal light.

In the United States, the Department of Justice, Secret Service, and Federal Bureau of Investigation, Immigration and Customs Enforcement, and Postal Inspection Service are charged with prosecuting criminals that engage in credit card fraud. However, they lack the resources to even go after all criminals and they have an overall policy of prosecuting cases of over $5,000.

Three improvements to card security have been implemented with the more common credit card networks, but up to now, none has worked to reduce the problem of credit card fraud. First, the cards themselves are being replaced with similar-looking tamper-resistant smart cards which are supposed to make it more difficult to fake the card. The majority of smart card (IC card) based credit cards abide the EMV (europay MasterCard Visa) standard. Second, there is a further 3 or 4 digit card security code (CSC) or card verification value (CVV) on the back of most cards now for use in card not present transactions. Stakeholders involved at all levels in electronic payment have realized the need to create uniform global standards for security that provide for and incorporate current and future security technologies. They have started to make up for these needs in organisations such as PCI DSS and the Secure POS Vendor Alliance.

Code 10

Code 10 refers calls made by merchants who are suspicious to accept a credit card.

The operator then proceeds to ask the merchant a series of questions that yield yes or no answers to determine whether the merchant is suspicious of the card or cardholder. The merchant may request that the card be retained if it can be safely done. The reward of returning a confiscated card to the issuing bank may be paid to the merchant, especially if an arrest is made.

Costs and Revenues of Credit Card Companies

Costs

• Charge offs: When a cardholder gets extremely delinquent from a debt, the creditor can decide to declare the debt a charge off. It will then be reported as such on the debtor’s credit bureau reports. (Equifax, for instance, has “R9” in the “status” column for a charge-off.) A charge-off is treated like “written off as uncollectible”. To the banks, bad debts and fraud are part of doing business. However, the debt is still legally valid, and the creditor may seek to collect the entire sum for the period of time allowed in the law. This includes contacts from the internal collections staff, or more likely, an outside collection agency. If it is sufficiently large there is a possibility of a lawsuit or arbitration.
• Fraud: In relative numbers the values lost in bank card fraud can be considered to be minor, being put in 2006 at 7 cents for every 100 dollars’ worth of transactions (7 basis points). In 2004, in the U.K., the cost of fraud was more than $500 million. When a card is stolen, or unauthorized duplicate made, most card issuers will refund some or all of the charges that the customer has obtained for things he did not purchase. These refunds will, in some cases, be at the cost of the merchant, particularly the mail order refund cases where the merchant will be unable to claim sight of the card. In a few countries the merchants will lose money if no ID card was asked for therefore the merchants usually require ID cards in these countries. Credit card companies usually promise to ensure the merchant will be paid on legitimate transactions with or without the consumer paying his credit card bill. Most banking services have their own credit card services that are in charge of the fraud cases, keeping a check for any possible attempt of fraud. Employees which are specialized in doing the fraud monitoring and investigation are often placed in Risk Management, Fraud and Authorization or Cards and Unsecured Business. Fraud monitoring focuses on fraud losses and their minimization and endeavors to trace the responsible and contain the situation. Credit card fraud is one of the major white-collar crimes that has been in existence for many decades despite the introduction of the chip-based card (EMV) which was implemented in some countries to prevent cases like these. Even with the application of such measures, credit card fraud remains a problem.
• Interest expenses: Banks usually borrow the money that they then lend to their customers. As they receive very low interest loans from other companies, they may lend as much as their customers may need, while lend their capital to other borrowers at a higher interest rate. If the card issuer charges 15% on money that they lend out to people, and the cost of lending out the money to them is 5%, and the balance is sitting with the cardholder for a year, the card issuer makes 10% on the money he lent out. This 10% difference is the “net interest spread” and the 5% is the “interest expense“.
• Operating costs: This is defined as the cost of running the credit card portfolio, including everything from paying the executives who run the company, printing the plastics, mailing the statements, running the computers that keep track of every cardholder’s balance, receiving the many phone calls which cardholders make to their issuer, and, protecting the customers from fraud rings. Depending on the issuer, marketing programs are also a significant amount of costs.
• Rewards (programs) There is a cost of these programs to the issuer

Revenues

Interchange Fee

In addition to fees paid by the card holder merchants must also pay the interchange fees to the card issue bank and the card association. For an average credit card issuer, interchange fee revenue can account for one-quarter of revenues.

These fees are frequently from 1 to 6 percent (will vary) of each sale but will differ not only from merchant to merchant (large merchants can negotiate lower rates), but from card to card, with business cards and rewards cards generally costing the merchants more to process. The interchange fee applied to a particular transaction is also influenced by many other variables including the type of merchant, the merchant’s total card sales volume, the merchant’s average transaction amount, whether the cards were present for the transaction, how information required for the transaction was received, the specific type of card, when transaction was settled and authorized and settled transaction amount. In some cases, the merchants add a surcharge to the credit cards to meet the interchange fee, by which they encourage their customers to either use cash, debit cards or even cheques.

The 2022-proposed change in Interchange fees, by encouraging the use of multiple card networks was criticised as likely to lead to fraud detection.

Interest on Outstanding Balance(s)

There are great differences in interest charges from among card issuers. Often, there are “teaser rates” or promotional APR in effect for initial periods of time (as low as zero percent for, say, six months) whereas regular rates can be as high as 40 percent. Apart from the federal government in the U.S. has no limit upon the interest or late fees that credit card issuers could charge, the interest rates are fixed by the states and some of the states such as south Dakota does not have any ceiling upon the interest and latefee and have invited some of the banks to establish their credit card operation in such states. Other states, such as Delaware have very weak usury laws. The teaser rate no longer applies, if the customer does not pay their bills on time and is replaced with a penalty interest rate (i.e. 23.99%) that is retroactive.

Transactors and Revolvers

Credit card analysts mark some of the accounts on a transactor (pays in full) or revolver continuum. The issuer requires both types of cardholders; some pay interest, others make mostly merchants pay fees.

Revolving Account

A revolving account is an account established by a financial institution that allows a customer to make a debt wherein the amount owed from said account is charged, and in which the borrower is not required to pay the entire amount outstanding on an account each month. The borrower may be asked to make a minimum payment, on the basis of the amount of balance. However, the borrower typically has the freedom to shell out the lender with whatever amount is between the minimum and the entire balance. If the balance is not paid in full by the end of a monthly billing period the remaining balance will roll over or “revolve” into the next month. Properly, interest will be imposed on that amount, and added on to the balance.

A revolving account is the type of line of credit, which is usually limited to a certain amount of credit; not all credit cards have a credit limit. The term can also be used to mean “for emergencies savings fund”.

Fees Charged to Customers

The major Credit Card Fees are for:

• Membership fees (annual or monthly), maybe a percentage of the credit limit.
• Cash advances, and convenience cheques (sometimes containing 3% of the amount)
• Charges that cause exceeding of limit on the credit card (whether on purpose or incidentally) called over limit fees
• Loading Fees on exchange rate, (sometimes, they may be not reported on the customer’s statement, even if they are charged) The variation of exchange rates applied by different credit cards can be very substantial as much as 10% in 2009 according to a report by Lonely Planet.
• Late or overdue payments
• Returned cheque fees / Handling processing fees (e. g. phone payment fee)
• Dealing in a foreign currency (up to 3% of amount). A few financial institutions do not carry any charge for this.
• Finance charge is any charge that is included in cost of borrowing money.
• Some card issuers charge customers that exceed a monthly usage cap (even if they pay off during the month and so never exceed their credit limit). And, other issuers charge customers who overpay and so have a negative balance.

In the US, the Credit CARD Act of 2009 states that credit card companies must give their cardholders a notice 45 days before they can raise or alter certain fees for their service. This includes annual fees, cash advance fee and late fees.

Controversy

One of the controversial areas is the trailing interest issue. Trailing interest is interest that is earned on one’s balance after the monthly statement has been generated, but before the balance is paid off. This extra interest is usually made in addition to the next month statement. U.S. Senator Carl Levin brought up the matter of the millions of Americans impacted by hidden fees, compounding interest and obtuse terms. Their woes were heeded in a Senate Permanent Subcommittee on Investigations hearing that Levin chaired, in which he reported that he wants to continue to keep the spotlight on credit card companies and that legislative action may be necessary to purge the industry. In 2009, the C.A.R.D. Act was signed into law that enacted some of the protections that Levin had raised.

Hidden Costs

In the United Kingdom, the right to charge customers different prices based on the method of payment was won by merchants because of The Credit Cards (Price Discrimination) Order 1990; this was later removed by the EU’s 2nd Payment Services Directive. As of 2007, the United Kingdom ranks as one of the most credit card-intensive countries in the world’s population, with the number of credit cards per consumer equaling 2.4, according to the United Kingdom Payments Administration Ltd.

In the United States until 1984, federal law had forbid surcharges on card transactions. Although provisions in the federal Truth in Lending Act that banned surcharges expired that year, several states have adopted laws proving that practice: there are laws against surcharges in California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Maine, New York, Oklahoma, and Texas. As of 2006, the United States most probably enjoyed one of the highest if not the highest ratio of credit cards to capita in the world. 984 million bank-issued Visa and MasterCard credit card and debit card accounts alone as part of this total correspond to an adult population of approximately 220 million individuals. The credit card per capita ratio in the United States was close to 4 : 1 as of 2003 and as high as 5 : 1 as of 2006.

Over-limit Charges

United Kingdom

Consumers who keep their account in good order by staying within their credit limit always, and making at least the minimum monthly payment will see interest as their biggest expense with their card provider. Those that were not so careful and regularly carried over their credit limit or were late in making payments were exposed to multiple charges, until a ruling from the Office of Fair Trading that they would presume charges over the GBP12 as unfair which prompted the majority of the card providers to reduce their charges to GBP12.

The higher fees originally charged were said to be meant to cover the entirety of the card operator’s business costs overall and to attempt to guarantee that the credit card business, as a whole, generated a profit, rather than simply recouping the cost to the provider of the limit breach, which has been estimated to be typically between the range of 3-4. Profiting from a customer’s mistakes is arguably not allowed under the U.K. common law if the charges amount to penalties for breach of contract, or under the Unfair Terms in Consumer Contracts Regulations 1999.

Subsequent rulings in respect of personal current accounts suggest that the argument that these charges are penalties for breach of contract is weak and given the Office of Fair Trading’s ruling it seems unlikely that any further test case will take place.

Whilst the law is still out on this, many consumers have made claims against their credit card providers in relation to the charges which they have incurred in addition to interest which they would have earned had the money not been deducted from their account. It is likely that claims for amounts charged in excess of GBP12 will succeed however claims for charges at the OFT’s GBP12 threshold level is more contentious.

United States

The Credit CARD Act of 2009 requires that consumers do opt in to over limit charges. Some of the card issuers have therefore started to send solicitations that ask their customers to opt into over-limit fees, as a benefit potentially to avoid the likelihood of a future transaction being declined. Other issuers have simply stopped the practice of charging over limit fees. Whether a customer decides to opt-in to the over limit fee or not, in practice, the banks will have discretion in whether they choose to authorize the transaction above the credit limit or not. Of course any approved over limit transactions will only result in an over limit fee for those customers who have opted-in to the fee. The activities of this legislation became effective on 22nd February 2010. As per this Act, the companies are now legally under obligation to indicate on the customer’s bills how long it would take them to pay off the balance.

France

What is called a credit card in the United States – that is, the customer has a bill to pay on the end of the month it does not exist in the French banking system. A debit card is used by the customer with funds debited from the customer’s account as the transaction is made whereas a credit card is debited at the end of the month automatically so that it is impossible for a customer to get into a debt by forgetting to pay the credit card bill. Specialized credit companies can offer these sorts of cards, and these are apart from the regular banking system. In this case, the consumer determines on the maximum amount which can not be exceeded.

Credit scores or credit history does not exist in France and hence neither does the need to build a credit history through credit cards. Personal information cannot be exchanged on a bank by bank basis, so there is no centralised system for tracking creditworthiness. The only centralized system in France is that of individuals who have not repaid credit or issued checks without sufficient funds or those who go into bankruptcy. This system is taken care of by the Banque de France.

Vietnam

In Vietnam, currently there are more than 39 million active credit cards. Credit limit in this country is determined by the bank or the card issuing organization depending upon various factors including the applicant’s income, credit score, credit history, and his or her personal financial profile. Credit limits are flexible, however, as they can be changed on request and agreement with the user and card provider. The penalty for exceeding the credit limit is determined by each bank and typically equals 1% to 5% of the amount exceeding the credit limit, per month. In addition, cardholders will also incur interest charges on the amount spent past the limit.

European Union

• Interchange fee cap: Interchange fee is a fee which is paid between banks for acceptance of card-based transactions and it is generally a percentage of the amount transacted. In EU, the interchange fee is limited:
  • For debit cards, up to 0.2% of amount of transaction This cap also goes for universal cards, which can serve as debit and credit cards.
  • For credit cards, a maximum of 0.3% of the transaction amount.
  • In comparison, Interchange Fees in Canada average to be 1.78%, and 1.73% in the US.
  • These caps are aimed at preventing excessive charging of fees and ensuring level playing field for all financial institutions.
• Fees outside the country of origin cap: According to the EU regulations, paying and withdrawing fees outside the country of origin are unlawful. This means that a French customer extracting money in Italy can not be made to pay more fees than a withdrawal in France. The same rule holds true for payment made using credit or debit cards. In general, this means that there are not going to be any additional fees for using a credit card abroad.

Neutral Consumer Resources

Canada

The Government of Canada has a database of the fees, features, interest rates and reward programs of almost 200 credit cards available in Canada. This database is updated on quarterly basis with information provided by credit card issuing companies. Information in the database is made publicly available quarterly on the website of Financial Consumer Agency of Canada (FCAC).

The information contained in the database is published into two formats. It is available in the form of the PDF comparison tables which break down the information according to the type of the credit card and allow the reader to compare the features of, for example, all the student credit cards in the database. This database also feeds into an interactive tool included on the FCAC website. The interactive tool involves several interview-type questions to determine a profile of the user’s credit card use habits and requirements and eliminate unsuitable choices, based on the profile, so that the user is shown a small number of credit cards and the ability to conduct detailed comparisons of features, reward programs, interest rates, etc.

Credit Cards in ATMs

Many credit cards can be used in an ATM to withdraw money against the credit limit extended to the card, but many card issuers charge interest on withdrawals of money before they do so on purchases. The interest for cash advance is usually charged from the date of withdrawal and unlike the interest on purchases, the interest on cash advances is not waived even though the customer pays the statement balance in full. Many card companies charge a commission for cash withdrawals, even if the ATM for which the charge is made is the same bank that issued the card. Merchants do not provide cashback on credit card transactions because they would pay a percentage commission of the added amount of cash to their bank or merchant services provider making it uneconomical. Discover is a major exception to the above. A customer who has a Discover card will be able to receive up to $120 cashback, depending on the merchant’s acceptance. This amount is simply added to the cost the card holder pays for the transaction and through it no extra fees are charged as the transaction is not considered a cash advance.

In the US, many credit card companies will also when applying payments to a card, do so, for the matter at hand, at the end of a billing cycle and apply those payments towards everything before cash advances. For this reason, many consumers carry huge cash balances and these have no grace period and will accrue interest at (usually) higher than their purchase rate and they will carry these balances for years, even if they pay off their statement balance each month. This practice is not allowed in the UK, where their law states that any payments will have to be assigned to the balance with the highest rate of interest first.

Acceptance Mark

An acceptance mark is a brand logo or design which shows what schemesyllab our card everyone- is accepted with an ATM or a merchant. Common uses are for decals, signs at merchant locations or in merchant’s advertisements. The purpose of the mark is to give the cardholder the information in which the card can be used. An acceptance mark is different to the card product name (such as American Express Centurion card, Eurocard) as it displays the name of the card scheme (group of cards) which is accepted. Acceptance mark is however equated with the card scheme mark presented on a card.

An acceptance mark is however not a guarantee that all cards belonging to a given card scheme will be accepted. On occasion cards issued in a foreign country may not be accepted by a merchant or ATM based upon contractual and legal restrictions.

Credit Card as Finance for Entrepreneurs

Credit cards and prepaid cards are a very risky way for an entrepreneur to obtain capital for their start ups when more conventional financing is unavailable. Len Bosack and Sandy Lerner used personal credit cards to get Cisco System started. Larry Page and Sergey Brin’s start up of Google was funded with credit cards to purchase the required computers and office equipment, more specifically “a terabyte of hard disks”. Similarly film maker Robert Townsend used credit cards to fund part of Hollywood Shuffle. Director Kevin Smith funded Clerks in part by running up several credit cards. Actor Richard Hatch also paid for his production of Battlestar Galactica: The Second Coming with the help of his credit cards. Famed hedge fund manager Bruce Kovner was funding his inaugural career (and, later on, his company Caxton Associates) in the financial markets by borrowing from his credit card. U.K. entrepreneur James Caan (as seen on Dragons ‘Den) used a number of credit cards to fund his first business.

However, these stories are outliers, as more than 80% of all startups fail in their first year, meaning anyone who tries this method of financing their startup faces great personal costs, as credit cards are in the name of a person, rather than that of a business.

Cashback Reward Programs

Cashback reward programs are incentive reward programs created by the ubiquitous credit card issuers to entice for the use of credit cards. Spending on the card usually rewards the card users with points or cash – points that the user could use to redeem to reward (gift cards, statement credits – cash deposited in an account of the card user’s choosing, or using the points to earn reward points of Frequent Flyer programs). Spending that qualifies for these types of points can include/exclude balance transfers, or payday loans or cash advances. Points usually do not have any cash value before redemption through the issuer.

Depending on the type of card, the cost of rewards will generally resemble 0.25% – 2.0% of the spread to the issuer. Networks such as Visa or MasterCard have raised their charges to enable the issuers to pay for their rewards system. Some of the issuers discourage redemption by requiring the cardholder to call customer service for rewards. On their servicing website redeeming of awards is usually a feature that is very well hidden by the issuers. Many of the credit card companies, especially those in the United Kingdom, Canada and United States, have these programs as promotional techniques to get the card used. Reward programs create a two sided market between merchants and consumers resulting in increased adoption of the credit card.

Card holders generally receive anywhere from 0.5% to 3% of their net expenditure (purchases less refunds) as an annual rebate which is either credited to the credit card account or rebates are disbursed to the card holder separately. Unlike unused gift cards, where the breakage in certain states in the USA goes to the state’s treasury, unspent credit card points are kept by the card’s issuer.

A public policy study done by the Federal Reserve in 2010 concluded that cash back reward programs amounted to a monetary transfer from poor to rich households. Eliminating cash back reward programs would reduce merchant fees which would in turn reduce consumer prices since retail is such a competitive environment.

Costs of Rewards Program to Merchant

When cutting deals with credit card as a payment method, Aux. When accepting payment by credit card, merchants will usually pay their bank or merchant services provider a percentage of the transaction amount as a commission. The credit card issuer is sharing some of this commission with the card holder via the credit card as an incentive to the card holder to use the credit card for the purpose of making a payment. Rewards-based credit card products such as cash back are more advantageous to consumers that pay their credit card statement off every month. Rewards based products in general have higher annual percentage rates. If the balance is not paid off each and every month, the extra interest will outweigh any rewards earned. Most consumers don’t know that their rewards based credit cards will have higher “interchange” charges for the vendors who accept them.