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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.[1] 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. This
is defined as 85.60 × 53.98 mm in size.
Credit cards are issued after an account
has been approved by the credit provider, after which cardholders can use it
to make purchases at merchants accepting that card.
When a purchase is made, the credit card user agrees to pay the card issuer.
The cardholder indicates consent to pay by signing a receipt with a record
of the card details and indicating the amount to be paid or by entering a
personal identification number (PIN). Also, many merchants now accept verbal
authorizations via telephone and electronic authorization using the
Internet, known as a 'Card/Cardholder Not Present' (CNP) transaction.
Electronic verification systems allow merchants 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. The verification is performed using a credit card payment terminal
or Point of Sale (POS) system with a communications link to the merchant's
acquiring bank. Data from the card is obtained from a magnetic stripe or
chip on the card; the latter system is in the United Kingdom and Ireland
commonly known as Chip and PIN, but is more technically an EMV card.
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.
These will typically involve the cardholder providing additional
information, such as the security code printed on the back of the card, or
the address of the cardholder.
Each month, the credit card user is sent a statement indicating the
purchases undertaken with the card, any outstanding fees, 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 for
details of the US regulations). 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 issuer charges interest on
the amount owed if the balance is not paid in full (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 bank accounts,
thus avoiding late payment altogether as long as the cardholder has
sufficient funds.
[edit] Advertising, solicitation, application and approval
Credit card advertising regulations include Schumer's box disclosure
requirements. A large fraction of junk mail consists of credit card offers.
The three major US credit bureaus (Equifax, TransUnion and Experian) have
chosen to allow consumers to opt out from receiving virtually all credit
card solicitation offers by mail. It can be done temporarily (via
1-888-5-OPTOUT (1-888-567-8688) or OptOutPreScreen.com and can be made
permanent via appropriate reply to a confirmation letter sent by postal mail
in response.[2]
[edit] Interest charges
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 transaction and repaid it in full within
this grace period, there would be no interest charged. If, however, even
$1.00 of the total amount remained unpaid, interest would be charged on the
$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
general calculation formula most financial institutions use to determine the
amount 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
multiply to the amount of the average daily balance (ADB) divided by 365 and
then take this total and multiply by the total number of days the amount
revolved before payment was made on the account. Financial institutions
refer to interest charged back to the original time of the transaction and
up to the time a payment was made, if not in full, as RRFC or residual
retail finance charge. Thus after an amount has revolved and a payment has
been made, the user of the card will still receive 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 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 with separate credit limits applicable to the various balance
segments. Usually this compartmentalization is the result of special
incentive offers from the issuing bank, to encourage balance transfers from
cards of other issuers. 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, or even if the issuing bank decides to raise its revenue. |
