Credit Cards description
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
which, during every transaction, the money from the
users's account is removed. But in case of credit card,
issuer lends money to the consumer (or the user). It is
also different from a charge card (though this name is
sometimes used by the public to describe credit cards),
that require the balance to be paid in full each month.
In contrast, a credit card allows the consumer to
'revolve' their balance, at the cost of having interest
charged. Most credit cards are the same shape and size,
as specified by the ISO 7810 standard.
How they Work
A user is issued a credit card after an account has been
approved by the credit provider (often a general bank,
but sometimes a captive bank created to issue a
particular brand of credit card, such as American
Express Centurion Bank), with which he or she will be
able to make purchases from merchants accepting that
credit card up to a preestablished credit limit.
When a purchase is made, the credit card user agrees to
pay the card issuer. Originally the user would indicate
his/her consent to pay, by signing a receipt with a
record of the card details and indicating the amount to
be paid, but many merchants now accept verbal
authorizations via telephone and electronic
authorization using the Internet.
Electronic verification systems allow 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. Other variations of
verification systems are used by eCommerce merchants to
determine if the user's account is valid and able to
accept the charge.
Each month, the credit card user is sent a statement
indicating the purchases undertaken with the card, and
the total amount owed. After receiving the statement,
the cardholder may dispute any charges that he or she
thinks are incorrect (see Fair Credit Billing Act).
Otherwise, the cardholder must pay a defined minimum
proportion of the bill by a due date, or may choose to
pay a higher amount up to 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). Some financial institutions can arrange for
automatic payments to be deducted from the user's
accounts.
Credit card issuers usually waive interest charges if
the balance is paid in full each month, but typically
will charge full interest on the entire outstanding
balance from the date of each purchase if the total
balance is not paid.
For example, if a user had a $1,000 outstanding balance
and pays it in full, there would be no interest charged.
If, however, even $1.00 of the total balance remained
unpaid, interest would be charged on the full $1,000
from the date of purchase until the payment is received.
The precise manner in which interest is charged is
usually detailed in a cardholder agreement which may be
summarized on the back of the monthly statement. (See
The TD Gold Travel Visa Cardholder Agreement Retrieved
January 3, 2006)
The credit card may simply serve as a form of revolving
credit, or it may become a complicated financial
instrument with multiple balance segments each at a
different interest rate, possibly with a single umbrella
credit limit, or possibly with separate credit limits
applicable to the various balance segments. Usually this
compartmentalization is the result of special incentive
offers from the issuing bank, either to incent balance
transfers from cards of other issuers, or to incent more
spending on the part of the customer. In the event that
several interest rates apply to various balance
segments, payment allocation is generally at the
discretion of the issuing bank, and payments will
therefore usually be allocated towards the lowest rate
balances until paid in full 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 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 of intense competition in the credit card
industry, credit providers often offer incentives such
as frequent flier miles, gift certificates, or cash back
(typically 1 percent) to try to attract customers to
their program.
Low interest credit cards or even 0% interest credit
cards are available. The only downside to consumers is
that the period of low interest credit cards is limited
to a fixed term, usually between 6 and 12 months.
However, services are available which alert credit card
holders when their low interest period is due to expire.
Most such services charge a monthly or annual fee.
For merchants, a credit card transaction is often more
secure than other forms of payment, such as cheques,
because the issuing bank commits to pay the merchant the
moment the transaction is verified. The bank charges a
commission (discount fee), to the merchant for this
service and there may be a certain delay before the
agreed payment is received by the merchant. In addition,
a merchant may be penalized or have their ability to
receive payment using that credit card restricted if
there are too many cancellations or reversals of
charges.
In some countries, like the Nordic countries, banks
guarantee payment on stolen cards only if ID card is
checked. In these countries merchants therefore usually
asks for ID.
Secured credit cards
A secured credit card is a type of credit card secured
by a deposit account owned by the cardholder. Typically,
the cardholder must deposit between 100% and 200% of the
total amount of credit desired. Thus if the cardholder
puts down $1000, he or she will be given credit in the
range of $500–$1000. In some cases, credit card issuers
will offer incentives even on their secured card
portfolios. In these cases, the deposit required may be
significantly less than the required credit limit, and
can be as low as 10% of the desired credit limit. This
deposit is held in a special savings account.
The cardholder of a secured credit card is still
expected to make regular payments, as he or she would
with a regular credit card, but should he or she default
on a payment, the card issuer has the option of
recovering the cost of the purchases paid to the
merchants out of the deposit.
Although the deposit is in the hands of the credit card
issuer as security in the event of default by the
consumer, the deposit will not be credited simply for
missing one or two payments. Usually the deposit is only
used as an offset when the account is closed, either at
the request of the customer or due to severe delinquency
(150 to 180 days). This means that an account which is
less than 150 days delinquent will continue to accrue
interest and fees, and could result in a balance which
is much higher than the actual credit limit on the card.
In these cases the total debt may far exceed the
original deposit and the cardholder not only forfeits
their deposit but is left with an additional debt.
Most of these conditions are usually described in a
cardholder agreement which the cardholder signs when
their account is opened.
Secured credit cards are an option to allow a person
with a poor credit history or no credit history to have
a credit card which might not otherwise be available.
They are often offered as a means of rebuilding one's
credit. Secured credit cards are available with both
Visa and MasterCard logos on them. Fees and service
charges for secured credit cards often exceed those
charged for ordinary non-secured credit cards, however,
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 can often be less expensive in total cost
than unsecured credit cards, even including the security
deposit. |
