Credit Card

 
A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.

A credit card is different from a charge card, where a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers to 'revolve' their balance, at the cost of having interest charged. Most credit cards are issued by local banks or credit unions, and are the shape and size specified by the ISO/IEC 7810 standard as ID-1.

CONTENTS

• Chapter 1 - Credit Cards
• Chapter 2 - Choosing A Credit Card
• Chapter 3 - Credit card associations

» VIEW COMPLETE TABLE OF CONTENTS «

Credit Card

1.6. Over limit charges

 
Consumers who keep their account in good order by always staying within their credit limit, and always making at least the minimum monthly payment will see interest as the biggest expense from their card provider. Those who are not so careful and regularly surpass their credit limit or are late in making payments are exposed to multiple charges that were typically as high as £25 - £35 until a ruling from the Office of Fair Trading that they would presume charges over £12 to be unfair which led the majority of card providers to reduce their fees to exactly that level.

UK

The higher level of fees originally charged were claimed to be designed to recoup the costs of the card operator's overall business and to ensure that the credit card business as a whole generated a profit, rather than simply recovering the cost to the provider of the limit breach which has been estimated as typically between £3-£4. Profiting from a customer's mistakes is arguably not permitted under UK common law, if the charges constitute penalties for breach of contract, or under the Unfair Terms In Consumer 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 OFT's ruling it seems unlikely that any further test case will take place.

Whilst the law remains in the balance, many consumers have made claims against their credit cards providers for the charges that they have incurred, plus interest that they would have earned had the money not been deducted from their account. It is likely that claims for amounts charged in excess of £12 will succeed, but claims for charges at the OFT's £12 threshold level are more contentious.

Source: wikipedia.org

1.6. Over limit charges

1.8. History

 
The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. Bellamy used the term credit card eleven times in this novel.

The modern credit card was the successor of a variety of merchant credit schemes. It was first used in the 1920s, in the United States, specifically to sell fuel to a growing number of automobile owners. In 1938 several companies started to accept each other's cards. Western Union had begun issuing charge cards to its frequent customers in 1921. Some charge cards were printed on paper card stock, but were easily counterfeited.

The Charga-Plate was an early predecessor to the credit card and used during the 1930s and late 1940s. It was a 2 1/2" x 1 1/4" rectangle of sheet metal, similar to a military dog tag, that was embossed with the customer's name, city and state (no address). It held a small paper card for a signature. It was laid in the imprinter first, then a charge slip on top of it, onto which an inked ribbon was pressed. Charga-Plate was a trademark of Farrington Manufacturing Co. Charga-Plates were issued by large-scale merchants to their regular customers, much like department store credit cards of today. In some cases, the plates were kept in the issuing store rather than held by customers. When an authorized user made a purchase, a clerk retrieved the plate from the store's files and then processed the purchase. Charga-Plates speeded back-office bookkeeping that was done manually in paper ledgers in each store, before computers.

The concept of customers paying different merchants using the same card was invented in 1950 by Ralph Schneider and Frank X. McNamara, founders of Diners Club, to consolidate multiple cards. The Diners Club, which was created partially through a merger with Dine and Sign, produced the first "general purpose" charge card, and required the entire bill to be paid with each statement. That was followed by Carte Blanche and in 1958 by American Express which created a worldwide credit card network.

Bank of America created the BankAmericard in 1958, a product which, with its overseas affiliates, eventually evolved into the Visa system. MasterCard came to being in 1966 when a group of credit-issuing banks established MasterCharge; it received a significant boost when Citibank merged its proprietary Everything Card, launched in 1967, into Master Charge in 1969. The fractured nature of the U.S. banking system meant that credit cards became an effective way for those who were traveling around the country to move their credit to places where they could not directly use their banking facilities. In 1966 Barclaycard in the UK launched the first credit card outside of the U.S.

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, store cards and so on.

In contrast, although having reached very high adoption levels in the US, Canada and the UK, it is important to note that many cultures were much more cash-oriented in the latter half of the twentieth century, or had developed alternative forms of cash-less payments, such as Carte bleue or the Eurocard (Germany, France, Switzerland, and others). In these places, the take-up of credit cards was initially much slower. It took until the 1990s to reach anything like the percentage market-penetration levels achieved in the US, Canada, or the UK. In many countries acceptance still remains poor as the use of a credit card system depends on the banking system being perceived as reliable.

In contrast, because of the legislative framework surrounding banking system overdrafts, some countries, France in particular, were much faster to develop and adopt chip-based credit cards which are now seen as major anti-fraud credit devices.

The design of the credit card itself has become a major selling point in recent years. The value of the card to the issuer is often related to the customer's usage of the card, or to the customer's financial worth. This has led to the rise of Co-Brand and Affinity cards - where the card design is related to the "affinity" (a university, for example) leading to higher card usage. In most cases a percentage of the value of the card is returned to the affinity group.

1.8.1. Collectible credit cards

A growing field of numismatics (study of money), or more specifically exonumia (study of money-like objects), credit card 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 plastic, then metal and fiber, then paper, and are now mostly plastic.

Source: wikipedia.org

1.8. History

1.9. Controversy

 
Credit card debt has increased steadily. Since the late 1990s, lawmakers, consumer advocacy groups, college officials and other higher education affiliates have become increasingly concerned about the rising use of credit cards among college students. The major credit card companies have been accused of targeting a younger audience, in particular college students, many of whom are already in debt with college tuition fees and college loans and who typically are less experienced at managing their own finances.

A 2006 documentary film titled Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders deals with this subject in detail. The nonprofit group Americans for Fairness in Lending works with Maxed Out to educate Americans about credit card abuse.

Another controversial area is the universal default feature of many North American credit card contracts. When a cardholder is late paying a particular credit card issuer, that card's interest rate can be raised, often considerably. With universal default, a customer's other credit cards, for which the customer may be current on payments, may also have their rates and/or credit limit changed. The universal default feature allows creditors to periodically check cardholders' credit portfolios to view trade, allowing these other institutions to decrease the credit limit and/or increase rates on cardholders who may be late with another credit card issuer. Being late on one credit card will potentially affect all the cardholder's credit cards. Citibank voluntarily stopped this practice in March 2007 and Chase stopped the practice in November 2007. The fact that credit card companies can change the interest rate on debts that were incurred when a different rate of interest was in place is similar to adjustable rate mortgages where interest rates on current debt may rise. However, in both cases this is agreed to in advance, and is a trade off that allows a lower initial rate as well as the possibility of an even lower rate (mortgages, if interest rates fall) or perpetually keeping a below-market rate (credit cards, if the user makes his debt payments on time). It should be noted that the Universal Default practice was actually encouraged by Federal Regulators, particularly those at the Office of the Comptroller of the Currency (OCC) as a means of managing the changing risk profiles of cardholders.

Another controversial area is the trailing interest issue. Trailing interest is the practice of charging interest on the entire bill no matter what percentage of it is paid. U.S Senator Carl Levin raised the issue at a U.S Senate Hearing of millions of Americans whom he said are slaves to hidden fees, compounding interest and cryptic terms. Their woes were heard in a Senate Permanent Subcommittee on Investigations hearing which was chaired by Senator Levin who said that he intends to keep the spotlight on credit card companies and that legislative action may be necessary to purge the industry.

In the United States, some have called for Congress to enact additional regulations on the industry; to expand the disclosure box clearly disclosing rate hikes, use plain language, incorporate balance payoff disclosures, and also to outlaw universal default. At a congress hearing around March 1, 2007, Citibank announced it would no longer practice this, effective immediately. Opponents of such regulation argue that customers must become more proactive and self-responsible in evaluating and negotiating terms with credit providers. Some of the nation's influential top credit card issuers, who are among the top fifty corporate contributors to political campaigns, successfully opposed it.

Hidden costs

In the United Kingdom, merchants won the right through The Credit Cards (Price Discrimination) Order 1990 to charge customers different prices according to the payment method. As of 2007, the United Kingdom was one of the world's most credit-card-intensive country, with 2.4 credit cards per consumer.

In the United States, until 1984 federal law prohibited surcharges on card transactions. Although the federal Truth in Lending Act provisions that prohibited surcharges expired that year, a number of states have since enacted laws that continue to outlaw the practice; California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Maine, New York, Oklahoma, and Texas have laws against surcharges. As of 2006, the United States probably had one of the world's if not the top ratio of credit cards per capita, with 984 million bank-issued Visa and MasterCard credit card and debit card accounts alone[36] for an adult population of roughly 220 million people. The credit card per US capita ratio was nearly 4:1 (as of 2003) and as high as 5:1 (as of 2006).

Redlining

Credit Card redlining is a spatially discriminatory practice among credit card issuers of providing different amounts of credit to different areas, based on their ethnic-minority composition, rather than on economic criteria, such as the potential profitability of operating in those areas.

Source: wikipedia.org

1.9. Controversy

Chapter 2 - Choosing A Credit Card

 
Choosing A Credit Card: The Deal is in the Disclosures

A credit card lets you buy things and pay for them over time. Using a credit card is a form of borrowing: you have to pay the money back.

When you are choosing a credit card, there are many features — and several kinds of cards — to consider: Fees, charges, interest rates, and benefits can vary among credit card issuers. As a result, some credit cards that look like a great deal at first glance may lose their appeal once you read the terms and conditions of use and calculate how the fees could affect your available credit.

CONTENTS

2.1. Credit Card Terms
   Fees
   Transaction Fees and Other Charges
   Annual Percentage Rate
   Grace Period
   Balance Computation Method for the Finance Charge
   Balance Transfer Offers
2.2. Balance Computation Methods
   Average Daily Balance
   Adjusted Balance
   Previous Balance
   Two-cycle or Double-cycle Balances
2.3. Other Costs and Features
   Default and Universal Default
   Special Delinquency Rates

Source: www.ftc.gov

Chapter 2 - Choosing A Credit Card

2.1. Credit Card Terms

 
Important terms of use generally must be disclosed in any credit card application and even in solicitations that don’t require an application. Here are the most important terms to understand — or ask about — when you are choosing among credit offers.

Fees. Many credit cards charge membership and/or participation fees. Issuers have a variety of names for these fees, including “annual,” “activation,” “acceptance,” “participation” and “monthly maintenance” fees. These fees may appear monthly, periodically, or as one-time charges, and can range from $6 to $150. What’s more, they can have an immediate effect on your available credit. For example, a card with a $250 credit limit and $150 in fees leaves you with $100 in available credit.

Transaction Fees and Other Charges. Some issuers charge a fee if you use the card to get a cash advance or make a late payment, or if you exceed your credit limit.

Annual Percentage Rate. The APR is a measure of the cost of credit, expressed as a yearly rate. It must be disclosed before your account can be activated, and it must appear on your account statements.

The card issuer also must disclose the “periodic rate.” That’s the rate the issuer applies to your outstanding balance to determine the finance charge for each billing period.

Some credit card plans let the issuer change the APR when interest rates or other economic indicators — called indexes — change. Because the rate change is linked to the index’s performance and varies, these plans are called “variable rate” programs. Rate changes also can raise or lower the finance charge on your account. If you’re considering a variable rate card, the issuer must tell you that the rate may change and how the rate is determined.

Before your account is activated, you also must be given information about any limits on how much your rate may change — and how often.

Grace Period. A grace period, also called a “free period,” lets you avoid finance charges if you pay your balance in full before the date it is due. Knowing whether a card gives you a grace period is important if you plan to pay your account in full each month. Without a grace period, the card issuer may impose a finance charge from the date you use your card or from the date each transaction is posted to your account.

Balance Computation Method for the Finance Charge. If you don’t have a grace period — or if you plan to pay for your purchases over time — it’s important to know how the issuer calculates your finance charge. Which balance computation method is used can make a big difference in how much of a finance charge you’ll pay — even if the APR and your buying patterns stay pretty much the same.

Balance Transfer Offers. Many credit card companies offer incentives for balance transfers — moving your debt from one credit card (Card Issuer A) to another (Card Issuer B). All offers are not the same, and their terms can be complicated.

For example, many credit card issuers offer transfers with low introductory rates. Some issuers also charge balance transfer fees. If Card Issuer B charges four percent to transfer $5,000 from Card Issuer A, your fee would be $200. In addition, if you pay late or fail to pay off your transferred balance before the introductory period ends, Card Issuer B may raise the introductory rate and/or charge you interest retroactively. And if you use your card from Card Issuer B to make new purchases, any payments you make will go toward your balance with the lowest interest rate — and finance charges at the higher interest rate will be assessed on the portion of your balance that came from new purchases.

2.1. Credit Card Terms

3.1.3. Credit Crisis

 
The credit crisis of 2007 and 2008 has strongly affected American Express' operations. Traditionally, banks lent their money on deposit to credit card holders for purchases. However, American Express (along with the largest credit card issuers such as Discover and Citigroup) does not have enough funds on deposit with its bank subsidiaries to fund all of its outstanding cards. Instead, it has long relied on selling its credit card loans as bonds in what is known as the asset backed securities market. As 2007 and 2008 progressed, investors were scared away from buying mortgage bonds, then business loan bonds, and finally most forms of credit card bonds. To prevent a major collapse of multiple large credit card lenders, the US government enacted a special program where the Federal reserve would purchase various bonds, including credit card, SBA loan, and other bonds, to ensure that the flow of credit would continue for the US economy. The federal reserve also allowed the company to convert into a bank holding company to take advantage of additional programs, such as a program which allows the company to borrow funds by selling bonds guaranteed by the government. These moves have been seen as essential for American Express to survive. One important reason for this is that credit card bonds aren't usually like mortgage bonds insofar as mortgage bonds are often sold with little or no recourse to the seller. Credit card bonds, however, can force American Express to inject cash into the bonds if the earnings within the bonds fall to a certain point, as credit card bonds were traditionally designed not with the purpose of protecting the seller from risks of non payment on the credit cards but rather providing the seller with the ability to lend more of the borrowed money than what would normally be allowed with bank deposits.

Source: wikipedia.org

3.1.3. Credit Crisis

3.3.3. Brand acceptance

 
Discover Card has over 50 million cardmembers and the Discover Network has more than 4 million merchant and cash access locations. The Pulse , (ATM) network currently serves more than 4,500 banks, credit unions, and savings institutions. However, unlike its competitors, the Discover Card is neither issued nor widely accepted outside the U.S., although it can be used to obtain cash from ATM locations worldwide. Owing to its heritage at Sears, an additional benefit of the Discover Card is the ability to make payments on the account, in person, at participating Sears stores.

In Canada, Discover brand cards are accepted at few locations, usually at businesses catering to American tourists, such as car rental agencies and hotels, as well as major American merchants like Sears and Wal-Mart. Some Canadian businesses do accept Discover cards but opt to favor Visa, Mastercard, American Express and Interac. ATM service offered by Discover is not currently available in Canada, although cardmembers apparently could access cash at any Sears Canada store.

In the United Kingdom, Discover issued credit cards on the MasterCard network under both the Goldfish and Morgan Stanley brands. This division was purchased from Lloyds TSB in 2005. It was subsequently sold to Barclays on February 7, 2008. These cards have since been rebranded as Barclaycard Goldfish and Barclaycard Platinum respectively.

While Discover brand cards are not currently accepted in Europe, the company's presence continues to grow in Mexico, Costa Rica, Micronesia, the Marshall Islands, Belize, Palau, and many of the Caribbean Island nations.

Additionally, in May 2005 Discover Network announced an alliance with China UnionPay Network. The two companies have signed a long-term agreement that will lead to acceptance of Discover Network brand cards at UnionPay ATMs and point-of-sale terminals in China and acceptance of China UnionPay cards on the PULSE network in the U.S. CUP cards have been accepted in the US since December 2005, and Discover Cards have been accepted in China since November 8, 2006. This partnership makes Discover Card the most widely accepted American card in China, beating out competitors Visa, MasterCard, and American Express. Neither Discover Financial Services nor China UnionPay have stated whether there had any plans to eventually expand acceptance to the other nations where the CUP network is in place, i.e., the Philippines, Singapore, Thailand, Vietnam, and South Korea. A similar agreement was made in August 2006, when the Discover Network announced an alliance with Japan’s JCB Network. JCB Cards will be accepted on the Discover Network in the United States, Puerto Rico, Guam and Northern Mariana Islands starting October 12, 2007 and China UnionPay Cards will be accepted on the Discover Network in the United States, Canada, Mexico, Central America and the Caribbean starting November 1, 2007.

On August 24, 2006, Discover’s PULSE network and the UK’s LINK ATM network announced a reciprocal agreement that will allow the more than 4,500 financial institution participants in the PULSE network to offer their cardholders access to all but a handful of the more than 58,000 cash machines across the UK and allow LINK to offer its 38 participating financial institution members access to more than 265,000 PULSE cash machines in the United States.

3.3.3. Brand acceptance

3.3.4. Discover acquires Diners Club

 
In April 2008, Discover Financial Services and Citigroup announced that Discover was purchasing the Diners Club network from Citi for $165 million. In May 2008, the U.S. approved the transaction. The deal was completed on July 1, 2008. Discover stated that the Diners Club network, which is a major network outside North America, will be merged with the Discover Network, a major network in North America, creating an international network for Discover Network cards and Diners Club cards. Diners Club cards will continue to be issued by Diners Club International licensees, including Citibank. Discover Bank has no plans on issuing Diners Club branded cards itself. Discover only purchased the network, and not the licensees issuing the cards.

3.3.4. Discover acquires Diners Club

3.5.3. Shareholders

 
Based on an SEC filing (DEF 14A) on April 24, 2008, MasterCard's largest current shareholders are:

(Class A Stock)
1.   15.6% - The Mastercard Foundation
2.   13.6% - Marsico Capital Management, LLC
3.   8.9% - Atticus Capital, LP
4.   5.1% - FMR Corp.

(Class M Stock)
1.   9.5% - Citigroup, Inc.
2.   8.5% - JP Morgan Chase & Co.
3.   5.1% - HSBC Holdings, LLC
4.   5.1% - Bank of America Corp.

(See Yahoo! Finance for updated data.)

3.5.3. Shareholders

3.5.4. IPO

 
The company, which had been organized as a cooperative of banks, had an initial public offering on May 25, 2006 at $39.00 USD. The stock is traded on the NYSE under the symbol MA.

3.5.4. IPO

3.5.8. Management and Board of Directors

 
Key executives include:

• Robert Selander: President and Chief Executive Officer
• Robert Reeg: President - Global Technology & Operations
• Lawrence Flanagan: Chief Marketing Officer - Global Marketing
• Gary Flood: President - Products & Services
• Noah Hanft: General Counsel, Chief Franchise Officer and Corporate President - International Markets
• Chris McWilton: President - US Markets
• Michael Michl: Chief Administration Officer
• Wendy Murdock: Chief Franchise Officer
• Javier Perez: President - Region Head MasterCard Europe
• André Sekulic: President - Region Head Asia/Pacific, Middle East & Africa
• Christopher Thom: Chief Risk Officer - Risk Management
• Stephanie Voquer: Chief Human Resources Officer

As of December 2004, the following banks are represented on MasterCard's board of directors:

• Europay España, S.A.
• HSBC
• Clarima Banca
• Capital One
• Banamex (Citigroup's Mexican division)
• Citigroup
• Royal Bank of Scotland
• MBNA America (now Bank of America)
• Westpac Banking Corporation
• Southern Bank Berhad
• Bank of Montreal
• Banque Fédérative du Crédit Mutuel
• Deutscher Sparkassen-und Giroverband
• Orient Corporation
• Bank AL Habib
• Banco Mercantil
• Banesco

Source: wikipedia.org

3.5.8. Management and Board of Directors

3.5.10. PayPass

 
MasterCard PayPass is an EMV compatible, "contactless" payment feature based on the ISO/IEC 14443 standard that provides cardholders with a simpler way to pay by tapping a payment card or other payment device, such as a phone or key fob, on a point-of-sale terminal reader rather than swiping or inserting a card.

In 2003, MasterCard concluded a nine-month PayPass market trial in Orlando, Florida, with JPMorgan Chase, Citibank, and MBNA. More than 16,000 cardholders and more than 60 retailer locations participated in the market trial. In addition, MasterCard worked with Nokia, AT&T Wireless, and JPMorgan Chase to incorporate MasterCard PayPass into mobile phones using Near Field Communication technology, in Dallas, Texas.

In 2005, MasterCard began to roll out PayPass in certain markets. As of September 2008, the following financial institutions have issued the MasterCard PayPass:

1. Bank of America
2. JP Morgan Chase (available through its "blink" contactless feature in the United States)
3. Citibank (both MasterCard credit and debit cards)
4. HSBC Bank USA (debit card only)
5. Washington Mutual (WaMu Debit MasterCard with PayPass) "Gold & Platinum Debit Cards"
6. Key Bank (debit card only)
7. Citizens Bank and Charter One Bank (both MasterCard credit and debit cards)
8. Commonwealth Bank (Australia)
9. Garanti Bank (Turkey, available through its Bonus Trink Card)
10. Banco de Oro Universal Bank (Philippines, available through its BDO International ATM Card)
11. Bank of Montreal (Canada, available on most Mosaik cards issued after November 1, 2007)
12. President's Choice Financial (Canada)
13. CIMB Bank (Malaysia)
14. Bank Zachodni WBK SA (Poland)
15. Deutsche Kreditbank AG (Germany, issuer of Lufthansa Miles & More credit cards)
16. Natwest (United Kingdom), on Maestro cards; limited use in the London Docklands and City of London)
17. HSBC (United Kingdom), on credit cards; limited use in selected areas of London
18. Canadian Tire Options Mastercard (Canada)
19. Capital One (Canada)
20. Barclaycard (UK)
21. Shinhan Bank (South Korea)

A U.S. issued HSBC Debit MasterCard with PayPass can be used in the U.K.

Source: wikipedia.org

3.5.10. PayPass