Credit card

From Wikipedia, the free encyclopedia

Credit cards. A credit card system is a type of retail transaction settlement 
and credit system, named after the small plastic card issued to users of the 
system. A credit card is different from a debit card in that the credit card 
issuer lends the consumer money rather than having the money removed from an 
account. It is also different from a charge card (though this name is 
sometimes used by the public to describe credit cards) in that charge cards 
require that the balance 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. The cardholder must then 
pay a minimum proportion of the bill by a due date, and may choose to pay the 
entire amount owed or more. 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 for purchases and 
pays the entire $1,000. 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 profit margins in the credit card industry can be quite high, credit 
providers often offer incentives such as frequent flier miles, gift 
certificates, or cash back (typically 1 percent) to try 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.