A credit card software system is a type of retail transaction settlement and credit system, named after the small plastic card issued to users of the system. A credit card is different from a debit card in that the credit card issuer lends the consumer money rather than having the money removed from an account. It is also different from a charge card (though this name is often used to describe credit cards by the public) in that charge cards do not extend the user credit -- the charges must be paid each month in full. 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.
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 they 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 more
or indeed pay the entire amount owed. The credit provider charges interest on
the amount owed (typically at a much higher rate than most other forms of
debt).
credit card issuers 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.
The credit card may serve as a form of revolving credit, or the user may
choose to apply any payments toward recent rather than previous debt. Interest
rates can vary considerably from card to card, and the interest rate on a
particular card may jump dramatically if the card user is late with a payment
on that card or any other credit instrument. As the rates and terms vary,
services have been set up allowing users to calculate savings available by
switching cards, which can be considerable if there is a large outstanding
balance (see external links for some on-line services).
Because profit margins in the credit card industry can be quite high, credit
providers often offer incentives such as frequent flier miles, gift
certificates, or cash back (typically 1 percent) to try attract customers to
their program.
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.
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. 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.
Often, though, if the cardholder does not make the required payment, many
issuers of secured credit cards consider that the account must be paid before
the security is released instead of using the security to pay the balance due.
The card is not cancelled, the balance is not set off the deposit, and
interest continues to accumulateon the unpaid balance for considerable periods
of time. In some cases the total charges may far exceed the original deposit
and the cardholder not only loses 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.
As well as convenient, accessible credit, the cards offer consumers an easy way to track expenses, which is necessary both for monitoring personal expenditures and the tracking of work-related expenses for taxation and reimbursement purposes. They have now spread worldwide, and are offered in a huge variety of permutations with differing credit limits, repayment arrangements (some cards offer interest-free periods, while others do not but compensate with much lower interest rates), and other perks (such as rewards schemes in which points "earned" for purchasing goods with the card can be reclaimed for further goods and services).
Some countries such as the United States limit the amount that a consumer can
be held liable for due to fraudulent transactions as a result of a consumer's
credit card being lost or stolen.
The low security of the credit card system presents countless opportunities
for fraud. This opportunity has created a huge black market in stolen credit
card numbers, which are generally used quickly before the cards are reported
stolen.
The goal of the credit card companies, as they say, is not to eliminate fraud,
but to "reduce it to manageable levels", such that the total cost of
both fraud and fraud prevention is minimized. This implies that high-cost
low-return fraud prevention measures will not be used if their cost exceeds
the potential gains from fraud reduction.
Most Internet fraud is done through the use of stolen credit card information
which is obtained in many ways, the simplest being copying information from
retailers, either online or offline. There have been many cases of hackers
obtaining huge quantities of credit card information from company databases.
Not unusual are cases of employees of companies that deal with millions of
customers in which they were selling the credit card information to criminals.
Despite efforts to improve security for remote purchases using credit cards,
systems with security holes are usually the result of poor implementations of
card acquisition by merchants. For example, a website that uses SSL to encrypt
card numbers from a client may simply email the number from the webserver to
someone who manually processes the card details at a card terminal. Naturally,
anywhere card details become human-readable before being processed at the
acquiring bank is a security risk. However, many banks offer systems such as
ClearCommerce, where encrypted card details captured on a merchant's webserver
can be sent directly to the payment processor.
The Federal Bureau of Investigation is the agency responsible for prosecuting
criminals who engage in credit card fraud in the United States, but they do
not have the resources to pursue all criminals. In general, they only
prosecute in cases exceeding $5,000 in value. Even though the FBI usually does
not investigate, most common credit card networks have not implemented
procedures to prevent credit card fraud. Three improvements to card security
have been introduced to the more common credit card networks but none has
proven to help reduce credit card fraud so far. First, the on-line
verification system used by merchants is being enhanced to require a 4 digit
Personal Identification Number (PIN) known only to the card holder. Second,
the cards themselves are being replaced with similar-looking tamper-resistant
smart cards which are intended to make forgery more difficult. The majority of
smartcard (IC card) based credit cards comply with the EMV (Europay MasterCard
Visa) standard. Third, an additional 3 or 4 digit code is now present on the
back of most cards, for use in "card not present" transactions. See
CVV2 for more information.
credit card issuers (banks) cover their costs (including the interest costs for the money that is paid to merchants prior to the bank being paid by customers), and earn profits, by:
credit card companies generally do provide a guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays their credit card bill. However, credit card companies generally will not pay a merchant if the consumer challenges the legitimacy of the transaction and will fine merchants who have a large number of chargebacks.
In recent times, credit card portfolios have been exceedingly profitable to banks, largely due to the booming economy of the late nineties. However in the case of credit cards, such high returns go hand in hand with risk, since the business is essentially one of making unsecured (uncollateralized) loans, and thus dependent on borrowers to not default in large numbers.
In some areas, such as Ireland, governments profit from credit cards through the imposition of a stamp duty or credit card tax. This is usually done where a cheque tax previously existed. This tax is taken automatically from the account, just like a purchase, by the bank on behalf of the government annually. This tax - unlike its cheque counterpart - is payable in arrears so no refund is possible.
The 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.
The concept of paying merchants using a card was invented in 1950 by Frank X.
McNamara in order to consolidate multiple cards. The Diners Club produced the
first charge card, which is similar but required the entire bill to be paid
with each statement; it was followed shortly thereafter by American Express.
Bank of America created the BankAmericard in 1958, a product which eventually
evolved into the Visa system ("Chargex" also became Visa).
MasterCard came to being in 1966 when a group of credit-issuing banks
established MasterCharge. The fractured nature of the US banking system meant
that credit cards became an effective way for those who were travelling around
the country to, in effect, move their credit to places where they could not
directly use 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, store cards and so on.
In contrast, although having reached very high adoption levels in the US and
the UK, it is important to note that in other cultures which were much more
cash-oriented in the latter half of the twentieth century such as Germany,
France, Switzerland among many others, 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 USA or 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.
credit card companies do not want merchants to charge credit card users more
than they charge other customers, even though the merchant pays a fee of 2 to
3 percent (merchants negotiate an exact percentage with their banks) to
process credit payments. If customers were responsible for this fee, it would
often discourage credit card usage. In many places, governments have passed
laws (at the urging of the credit card industry) to make this illegal. Despite
this, some retailing sectors flout this regulation, especially in areas of
very competitive, commodity products such as personal computers, where the
fine print of an advertisement states "prices already cash discounted --
surcharge for credit card". Other retailers offer incentives or bonus
coupons for using cash, such as Canadian Tire Money. Some critics have
observed that this results in what is effectively a hidden tax on all
transactions conducted by merchants who accept credit cards since they must
build the cost of transaction fees into their overall business expense. The
end result is that cash consumers are essentially subsidizing credit card
holder purchases. The cost of the convenience enjoyed by card holders and the
profits taken from transaction fees by the card industry (which has come to
rely increasingly on this revenue stream over the years) is partially
offloaded onto the backs of the cash consumer. Critics go on to say that
further compounding the issue is the fact that the consumers most likely to
pay in cash are the least able to afford the additional expense (card holders
are more likely to be affluent, non-card holders less so). Australia is
currently acting to reduce this by allowing merchants to apply surcharges for
credit card users. 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, but few merchants do so (the most
notable exceptions being budget airlines and travel agents).
However, there also exists an economic argument that credit card use increases
the "velocity" of money in an economy, the result, higher consumer
spending rates and higher GDP. Although there is many a sad story of credit
card abuse, the trend is increasing use, with some predicting a cashless
society in the not so distant future. There is some controversy about credit
card usage in recent years. credit card debt has soared, particularly among
young people. 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. credit card usage has tripled
since 2001 amongst teenagers as well. The United Kingdom is the world's most
credit-card-intensive country, with 67 million credit cards for a population
of 59 million people.[1]
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. A recent study by
United College Marketing Services has shown that student credit lines have
swollen to over $6,000. Since eighteen year-olds in many countries and most
U.S. states are eligible for a card without parental consent or employment,
the likelihood of increased balances, unwise use of credit and damaged credit
scores increases.
According to Larry Chiang of UCMS, an example of a credit card class action
was where issuers were "rolling back" posting times to extract more
late fees. The due dates were "rolled back" from 1pm to 10am because
mail was delivered in the afternoon so due dates were actually rolled back to
charge more late fees. The following banks are listed (with the amounts
penalized) in this one particular class action.
Providian: $405m
Citibank: $15.5m
Chase: $22.2m
Bank One: $40m
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. Given this circumstance with one credit card, universal default
allows other card issuers to raise the cardholder's interest rates on other
accounts, even if those other accounts are not in default.
In the USA, Congress has been slow to introduce credit card reform
legislation. A push toward expanding the disclosure box and incorporating
balance payoff disclosures on credit card statements would go a long way in
clarifying credit card debt's ramifications.
The numbers found on credit cards have a certain amount of internal structure, and share a common numbering scheme.
The card number's prefix is the sequence of digits at the beginning of the number that determine the credit card network to which the number belongs. The card number's length is its number of digits.
The prefixes and lengths for the most common card types are:
| Card Type | Prefix(es) | Length |
|---|---|---|
| American Express | 34 or 37 | 15 |
| BankCard | 560–561 | 16 |
| Diners Club / Carte Blanche* | 300–305, and 38 | 14 |
| Discover Card | 6011,6500–6509** | 16 |
| JCB | 3 | 16 |
| JCB | 1800,2131 | 15 |
| MasterCard | 51–55, 36 | 14,16 |
| Visa | 4 | 13 or 16 |
*As of November 8, 2004, MasterCard purchased the domestic (US) Diner's Club BIN range. Diner's Club International BIN range will remain (starting with 38), but the 36 bin range will now be processed as MasterCards.
**As of October 1st, 2005, Discover Bank will include a new BIN in the range of 650000–650999.
In addition, the first 6 digits of the credit card number are known as the Bank Identification Number (BIN). These identify the institution that issued the card to the card holder.
Some credit card issuers choose to restrict the card numbers they issue to those which pass a checksum test, where the final digit of the card number is used to confirm the initial digits.
This has two benefits of preventing casual attempts to invent credit numbers (only one in ten will be valid), and also prevent mistakes when the card number is manually recorded. The checksum test for credit card numbers is the Luhn formula, described in Annex B to ISO/IEC 7812, Part 1.
American Express, in particular follows the following specific algorithm:
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, then metal and fiber, then paper and are now mostly plastic.
Reuters - The Obama administration on Wednesday expanded its foreclosure prevention efforts to help a greater number of underwater homeowners refinance their mortgages.