Credit card
A credit card (or charge card) is a payment card, usually issued by a bank, allowing the card's users to purchase goods and services, or withdraw cash on credit. Card use thereby accrues debt that must be repaid later.
Overview
A credit card (or charge card) is a payment card, usually issued by a bank, allowing the card's users to purchase goods and services, or withdraw cash on credit. Card use thereby accrues debt that must be repaid later. A normal credit card differs from a charge card, which requires the balance to be repaid in full each month or at the end of each statement cycle. By contrast, credit cards allow consumers to build a continuing debt balance, subject to interest charged at a specific rate. Moreover, a credit card differs from a charge card in that a credit card typically involves a third-party entity that pays the seller and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date. A credit card also differs from a debit card, which can be used like currency by the card's owner. In June 2018, there were 7.75 billion credit cards in the world. In 2020, there were 1.09 billion credit cards in circulation in the United States; with 72.5% of adults (187.3 million people) having at least one credit card.
Early charge cards and coins
Starting in the late 19th century, charge cards were available in various shapes and sizes; they were made of celluloid, copper, aluminum, steel, and other types of whitish metals. Some cards were shaped like coins, with a small hole allowing them to be placed on key rings. These charge coins were usually given to customers having charge accounts with hotels or department stores. Each card had a charge account number, along with the merchant's name and logo. By imprinting the coin onto a sales slip, the charge card and charge coin offered a convenient way to copy the identifying information of a charge account. The Charga-Plate, developed by Farrington Manufacturing Company in 1928, was an early predecessor of the credit card and was used in the US from the 1930s until the late 1950s. It was a 2+1⁄2-by-1+1⁄4-inch (64 mm × 32 mm) rectangle of sheet metal embossed with the customer's name, city, and state, which held a small paper card on its back for signature. When recording a purchase, the plate was laid into a recess in the imprinter device with a paper charge slip and an inked ribbon on top; these were pressed together to record the imprint. Charga-Plates were issued by large-scale merchants to their regular customers, much like later department-store credit cards. In some cases, the plates were kept in the issuing store rather than being 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 sped up bookkeeping and reduced manual copying errors.
Air Travel Card
In 1934, American Airlines and the Air Transport Association simplified the process further with the advent of the Air Travel Card. They created a numbering scheme that identified the card's issuer as well as the customer's account. With an Air Travel Card, passengers could "buy now, and pay later" for a ticket against their credit and receive a 15% discount at any accepting airline. By the 1940s, all major US airlines offered Air Travel Cards that could be used with 17 different airlines. By 1941, about half of the airlines' revenues came through the Air Travel Card agreement. In addition, the airlines offered installment payment plans to attract new travelers to purchase airline tickets. In 1948, the Air Travel Card became the first internationally valid charge card for all members of the International Air Transport Association.
Early general-purpose charge cards
The concept of customers using the same card to pay different merchants was expanded in 1950 by Ralph Schneider and Frank McNamara, the founders of Diners Club, to consolidate multiple cards. Diners Club, which was created partly 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 card was followed by Carte Blanche, and in 1958 by American Express, which created a worldwide charge card network.
BankAmericard and Master Charge
Until 1958, no company or organization could successfully establish a revolving credit financial system in which a card issued by a third-party bank was generally accepted by a large number of merchants. All previous charge cards were issued by merchants, not banks, and were only accepted by a limited number of merchants by agreement. In 1958, Bank of America launched the BankAmericard in Fresno, California, which became the first successful program recognizable as a modern credit card. This card solved a problem: consumers did not want to use a card that few merchants would accept, and merchants did not want to accept a card that few consumers used. Bank of America chose Fresno because 45% of the city's residents used the bank, and by sending a card to 60,000 Fresno residents simultaneously, the bank could convince merchants to accept the card. The card was eventually licensed to other banks around the United States and then around the world. In 1976, all BankAmericard licensees unified themselves under the common brand Visa. In 1966, the ancestor of MasterCard was created when a group of banks established Master Charge to compete with BankAmericard; Master Charge received a significant boost when Citibank merged its own Everything Card (launched in 1967) into Master Charge in 1969. Early credit cards in the US were mass-produced and mass-mailed, unsolicited, to bank customers who were deemed to be low risk. However, according to Life magazine, cards were "mailed off to unemployable people, drunks, narcotics addicts and to compulsive debtors", which Betty Furness, President Johnson's Special Assistant, compared to "giving sugar to diabetics." These mass mailings were known as "drops" in banking terminology, and they were outlawed in 1970 due to the financial chaos they caused. However, by the time this law came into effect, approximately 100 million credit cards had been dropped into the US population. After 1970, only applications for credit cards could be sent unsolicited in mass mailings. This system was computerized in 1973 under the leadership of Dee Hock, the first CEO of Visa, allowing reduced transaction time. However, until always-connected payment terminals became ubiquitous at the beginning of the 21st century, many merchants accepted all charges, especially those below a threshold value—or from known and trusted customers—without verifying the charges by phone. Books with lists of stolen card numbers were distributed to merchants who were expected, in any case, to take two actions: check cards against the lists before accepting them, and verify the signature on the charge slip against the one on the card. Merchants who failed to follow proper verification procedures were liable for fraudulent charges, but because the procedures were cumbersome, merchants often skipped some or all of them, and they assumed the risk for smaller transactions. In the US, the early credit card industry was characterized by regional monopolies. Several landmark antitrust court cases, including the 1978 Supreme Court case Marquette National Bank of Minneapolis v. First of Omaha Service Corp., led to substantial reforms that made the credit card industry more competitive. A 2024 study estimated that these competitive reforms resulted in significant gains for consumers, particularly the poor.
Development outside North America
In 1966, the United Kingdom's Barclays Bank launched Barclaycard, the first credit card outside the United States. 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, and store cards. During the late 20th century, credit cards reached very high adoption levels in several countries: the United States, Canada, the United Kingdom, Australia, and New Zealand. However, many cultures were more cash-oriented or developed alternative forms of cashless payment, such as Carte Bleue or the Eurocard (in Germany, France, Switzerland, and other countries). In these places, adoption of credit cards was initially much slower. Due to strict regulations on bank overdrafts, some countries were much quicker to develop and adopt chip-based credit cards, which are regarded as major anti-fraud credit devices. Debit cards, online banking, ATMs, mobile banking, and installment plans are used more widely than credit cards in some countries. Global credit card usage did not catch up to levels in the United States, Canada, and the United Kingdom until the 1990s. Because of differences between national banking systems, credit card usage is still low in some areas. For example, Japan is still a cash-oriented society, with credit card adoption limited mainly to the largest merchants.
Vintage credit cards as collectibles
The physical design of the credit card has become a major selling point. Credit card collectors seek various embodiments of credit—from newer plastic cards to older paper merchant cards, and even metal tokens that were once accepted as merchant credit cards.
Cash advance
A cash advance is a credit card transaction that withdraws cash rather than purchasing a good or service. The process can occur through an ATM, or it can occur over the counter at a bank or other financial agency, up to a certain limit; for a credit card, this will be the credit limit (or a percentage of it). Cash advances often incur a fee of 3–5% of the amount borrowed. When done through a credit card, the interest is often higher than on other credit card transactions. The interest compounds daily starting from when the cash is borrowed. Credit card purchases of items viewed as cash are sometimes deemed cash advances in accordance with the guidelines of the credit card network, thereby incurring a higher interest rate with no grace period. These purchases often include money orders, prepaid debit cards, lottery tickets, gaming chips, mobile payments, and certain taxes and fees paid to governments. However, if a merchant does not disclose the nature of a transaction, it will be processed as a normal credit card transaction. Many merchants have passed credit card processing fees on to cardholders despite a credit card network's guidelines, which state that cardholders should incur no extra fee for performing a transaction with a credit card. Under card scheme rules, a credit card holder requesting a cash advance and presenting an accepted form of identification must be issued a cash advance over the counter at any bank that issues that type of credit card, even if the cardholder cannot provide their personal identification number (PIN). A Japanese law enabling cash back from a credit card came into force in 2010. However, a legal loophole in this system was quickly exploited by online shops dedicated to providing cash back as a form of easy loan with exorbitant rates. At first, the online store sold a single inexpensive item—such as a glass marble, a golf tee, or an eraser—with an ¥80,000 wire transfer for a ¥100,000 (US$1,200) credit card payment. A month later, when the credit card provider charged the card owner the full fee, the online store was out of the picture with no liability. In effect, the online cashback services provided loans with a 300% annual interest rate. On 19 October 2010, Hideki Fukuba became the first operator of such an online cashback service to be charged by the police. He was charged with tax evasion of ¥40 million in unpaid taxes.
Usage
A credit card issuer, such as a bank or a credit union, enters into agreements with merchants to accept its credit cards. Merchants often advertise with signage or other corporate material which cards they accept by displaying acceptance marks generally derived from logos. Alternatively, this information may be communicated, for example, via a restaurant's menu or orally (e.g., by saying, "We don't take credit cards"). The credit card issuer provides a card to a customer at the time or after an account has been approved by the credit provider, which need not be the same entity as the card issuer. Cardholders can then use the card to make purchases at merchants accepting it. When a purchase is made, the cardholder 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 alternatively by entering a PIN. In addition, many merchants accept verbal authorization by telephone or electronic authorization via the Internet, which is known as a card-not-present transaction. Electronic verification systems allow merchants to confirm in a few seconds that a card is valid and the cardholder has sufficient credit to cover a purchase, allowing verification to happen at purchase time. This verification is performed using a credit card payment terminal or a point-of-sale system with a communications link to the merchant's acquiring bank. Data from the card is obtained from a magnetic stripe or a chip on the card; the latter system is called chip and PIN in the United Kingdom and Ireland, and it is implemented as an EMV (Europay, Mastercard, and Visa) card. For card-not-present transactions where the card is not shown (e.g., e-commerce, mail order, and telephone sales), merchants additionally verify that the customer is in physical possession of the card and is the authorized user; this is done by asking the customer for additional information, such as the security code on the back of the card, the card's expiry date, and the customer's billing address. Each month, a cardholder is sent a statement indicating the purchases made with their card, any outstanding fees, the total amount owed, and the minimum payment due. In the US, after receiving a statement, the cardholder may dispute any charges thought to be incorrect (see 15 U.S.C. § 1643, which limits cardholder liability for unauthorized use of a credit card to US$50). The Fair Credit Billing Act gives details of the US regulations. In addition, many banks offer the option of electronic statements, either instead of or in addition to physical statements, which can be viewed at any time by the cardholder via the issuer's online banking website. Notification that a new statement is available is generally sent to a cardholder's email address. If the card issuer allows it, the cardholder may have additional payment options beyond a physical check, such as an electronic funds transfer from a checking account. Depending on the issuer, a cardholder may also be able to make multiple payments during a single statement period, potentially letting the cardholder utilize a card's credit limit several times.
Minimum payment
The cardholder must pay a defined minimum portion of the amount owed by a due date, or they may choose to pay a higher amount. The credit issuer charges interest on the unpaid balance if the billed amount is not paid in full (typically at a much higher rate than most other forms of debt). These effects account for roughly 8% of all interest paid. In particular, hiding the minimum payment option for automatic and manual payments, and focusing on the total debt, may mitigate the unwanted consequences of default minimum payments. In addition, if the cardholder fails to make at least the minimum payment by the due date, the issuer may impose a late fee or other penalties. To help mitigate this risk to the consumer, some financial institutions can arrange for automatic payments to be deducted from the cardholder's bank account, thus avoiding such penalties altogether, as long as the cardholder has sufficient funds. In cases where the minimum payment is less than the finance charges assessed during a billing cycle, the outstanding balance will increase in what is called negative amortization. This practice tends to increase credit risk and mask the lender's portfolio quality, and it has consequently been banned in the US since 2003.
Advertising, solicitation, application, and approval
US regulations on credit card advertising include the disclosure requirements for a Schumer box. A large fraction of junk mail consists of credit card offers created from lists provided by the major credit reporting agencies. In the US, the three major US credit bureaus (Equifax, TransUnion, and Experian) allow consumers to opt out of related credit card solicitation offers through the OptOutPrescreen.com website.
Interest charges
Credit card issuers usually waive interest charges if the balance is paid in full each month, but issuers typically 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 cardholder made a $1,000 transaction and repaid it in full within the grace period above, no interest would be charged. If, however, even $1 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 that most financial institutions use to determine the amount of interest to charge includes three quantities: the annual percentage rate (APR), the average daily balance (ADB), and the total number of days the amount revolved before payment was made on the account. This formula is as follows: (APR/100 × ADB)/365 × number of days revolved. Financial institutions use the term residual retail finance charge (RRFC) for interest charged back to the original time of the transaction and up to the time a payment was made, if not in full. 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 contain only an interest charge that was collected up until the date that 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 the cards of other issuers. If several interest rates apply to various balance segments, then payment allocation is generally at the discretion of the issuing bank, and therefore payments will usually be allocated toward the lowest rate balances until these are paid in full, before any money is paid toward higher rate balances. Interest rates can vary considerably between cards, and the interest rate on a particular card may jump dramatically if the cardholder is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to increase its revenue.
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