CREDIT CARD

2007-11-10T07:12:00.000-08:00

A credit card is a system of payment named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user's account after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the user). Playboy is also different from a charge card (though this name is sometimes used by the public to describe credit cards), which requires the balance to 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.
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How credit cards work

An example of the front of a typical credit card: Issuing bank logo EMV chip Hologram Card number Card brand logo Expiry Date Cardholder's name

An example of the reverse side of a typical credit card: Magnetic Stripe Signature Strip Card Security Code A user is issued credit after an account has been approved by the credit provider, and is given a credit card, with which the user will be able to make purchases from merchants accepting that credit card up to a pre-established credit limit. Often a general bank issues the credit, but sometimes a captive bank created to issue a particular brand of credit card, such as Chase, Wells Fargo or Bank of America issues the credit. When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates their 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 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 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 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 bank 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 and pays it in full, there would be no interest charged. If, however, even $1.00 of the total balance 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 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 that 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, either to encourage balance transfers from cards of other issuers, or to encourage 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, or even if the issuing bank decides to raise its revenue. 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 of intense competition in the credit card industry, credit providers often offer incentives such as frequent flier points, gift certificates, or cash back (typically up to 1 percent based on total purchases) 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 after which a higher rate is charged. 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.
Grace period

A credit card's grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 30 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met. Usually, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charge(s) incurred depends on the grace period and balance, with most credit cards there is no grace period if there's any outstanding balance from the previous billing cycle or statement (ie. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.

The merchant's side

An example of street markets accepting credit cardsFor merchants, a credit card transaction is often more secure than other forms of payment, such as checks, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on their credit card payment (except for legitimate disputes, which are discussed below, and can result in charge backs to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees. For each purchase, the bank charges a commission (discount fee), to the merchant for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to compensate for the transaction costs, though this is not always allowed by the credit card consortium. In some countries, like the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card's PIN code for identification, and in that case showing an ID card is not necessary.
Parties involved

Cardholder: The owner of the card used to make a purchase; the consumer. Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case. Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder
Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.

Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.
Merchant account provider: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with. Credit Card association: An association of card-issuing banks such as Visa, MasterCard, Discover, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.
Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks. Transaction processing networks include: Cardnet, Nabanco, Omaha, Paymentech, NDC Atlanta, Nova, Vital, Concord EFSnet, and VisaNet
Affinity partner: Some institutions lend their name to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities and charities.

The flow of information and money between these parties — always through the card associations — is known as the interchange, and it consists of a few steps.

Transaction steps

Authorization: When the cardholders pays for the purchase, the merchant performs some risk assessment and may submit the transaction to the acquirer for authorization. The acquirer verifies with the issuer—almost instantly—that the card number and transaction amount are both valid, and informs the merchant on how to proceed. The issuer may provisionally debit the funds from the cardholder's credit account at this stage.

Batching: After the transaction is authorized it is then stored in a batch, which the merchant sends to the acquiring bank later to receive payment (usually at the end of the day). Clearing and settlement: The acquiring bank sends the transactions in the batch through the card association, which debits the card-issuing bank for the transaction amount, and credits the acquirer for the transaction amount minus the interchange fee.

Funding: The acquiring bank pays the merchant. The amount the merchant receives is equal to the transaction amount minus the discount rate charged by the acquiring bank to the merchant for the service. The entire process, from authorization to funding, usually takes about 2-7 business days. However, many merchant card processors offer next-day deposits to customers subject to type of banking account. In the event of a chargeback (when there's an error in processing the transaction or the cardholder disputes the transaction), the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

Secured credit cards
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. In some cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases, the deposit required may be significantly less than the required credit limit, and can be as low as 10% of the desired credit limit. This deposit is held in a special savings account. Credit card issuers offer this as they have noticed that delinquencies were notably reduced when the customer perceives he has something to lose if he doesn't repay his balance. 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. The advantage of the secured card for an individual with negative or no credit history is that most companies report regularly to the major credit bureaus. This allows for rebuilding of positive credit history. Although the deposit is in the hands of the credit card issuer as security in the event of default by the consumer, the deposit will not be debited simply for missing one or two payments. Usually the deposit is only used as an offset when the account is closed, either at the request of the customer or due to severe delinquency (150 to 180 days). This means that an account which is less than 150 days delinquent will continue to accrue interest and fees, and could result in a balance which is much higher than the actual credit limit on the card. In these cases the total debt may far exceed the original deposit and the cardholder not only forfeits 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, however, for people in certain situations, (for example, after charging off on other credit cards, or people with a long history of delinquency on various forms of debt), secured cards can often be less expensive in total cost than unsecured credit cards, even including the security deposit. Sometimes a credit card will be secured by the equity in the borrower's home.[3][4] This is called a home equity line of credit (HELOC).

Prepaid credit cards

A prepaid credit card is not really a credit card, as no credit is offered by the card issuer: the card-holder spends money which has been "stored" via a prior deposit by the card-holder or someone else, such as a parent or employer. However, it carries a credit-card brand (Visa or MasterCard) and can be used in similar ways. As more consumers require a suitable solution to rebuilding credit, recent changes have allowed some credit card companies to offer pre-paid credit cards to help rebuild credit. They are hard to find and have higher APR fees and higher interest costs. After purchasing the card, the cardholder loads it with any amount of money and then uses the card to spend the money. Prepaid cards can be issued to minors since there is no credit line involved. The main advantage over secured credit cards is that you are not required to come up with $500 or more to open an account. Also most secured credit cards still charge you interest even though you are not actually "borrowing" any money. With prepaid credit cards you are not charged any interest but you are often charged monthly fees after an arbitrary time period. Many other fees also usually apply to a prepaid card.[5] Prepaid credit cards are often marketed to teenagers for shopping online without having their parents complete the transaction. Because of the many fees that apply to obtaining and using credit-card-branded prepaid cards, the Financial Consumer Agency of Canada describes them as "an expensive way to spend your own money". The agency publishes a booklet, "Pre-paid cards", which explains the advantages and disadvantages of this type of prepaid card.

Features

As well as convenient, accessible credit, credit cards offer consumers an easy way to track expenses, which is necessary for both monitoring personal expenditures and the tracking of work-related expenses for taxation and reimbursement purposes. Credit cards are accepted worldwide, and are available with a large variety of credit limits, repayment arrangement, and other perks (such as rewards schemes in which points earned by purchasing goods with the card can be redeemed for further goods and services or credit card cashback). Some countries, such as the United States, the United Kingdom, and France, limit the amount for which a consumer can be held liable due to fraudulent transactions as a result of a consumer's credit card being lost or stolen.

Security

A smart card, combining credit card and debit card properties. The 3 by 5 mm security chip embedded in the card is shown enlarged in the inset. The gold contact pads on the card enable electronic access to the chip.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 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[citation needed]. 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. 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, a security risk is created. 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. Controlled Payment Numbers are another option for protecting one's credit card number: they are "alias" numbers linked to one's actual card number, generated as needed, valid for a relatively short time, with a very low limit, and typically only valid with a single merchant. The Federal Bureau of Investigation and U.S. Postal Inspection Service are 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, federal officials only prosecute cases exceeding US $5000 in value. 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. The way credit card owners pay off their balances has a tremendous effect on their credit history. All the information is collected by credit bureaus. The credit information stays on the credit report, depending on the jurisdiction and the situation, for 1, 2, 5, 7 or even 10 years after the debt is repaid.

Profits and losses

In recent times, credit card portfolios have been very profitable for 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 not to default in large numbers.

Costs

Credit card issuers (banks) have several types of costs:

Interest expenses

Banks generally borrow the money they then lend to their customers. As they receive very low-interest loans from other firms, they may borrow as much as their customers require, while lending their capital to other borrowers at higher rates. If the card issuer charges 15% on money lent to users, and it costs 5% to borrow the money to lend, and the balance sits with the cardholder for a year, the issuer earns 10% on the loan. This 5% difference is the "interest expense" and the 10% is the "net interest margin".
Operating costs

This is the cost of running the credit card portfolio, including everything from paying the executives who run the company to printing the plastics, to mailing the statements, to running the computers that keep track of every cardholder's balance, to taking the many phone calls which cardholders place to their issuer, to protecting the customers from fraud rings. Depending on the issuer, marketing programs are also a significant portion of expenses.

Charge offs

When a consumer becomes severely delinquent on a debt (often at the point of six months without payment), the creditor may declare the debt to be a charge-off. It will then be listed as such on the debtor's credit bureau reports (Equifax, for instance, lists "R9" in the "status" column to denote a charge-off.) It is one of the worst possible items to have on your file. [citation needed] The item will include relevant dates, and the amount of the bad debt.[9] A charge-off is considered to be "written off as uncollectable." To banks, bad debts and even fraud are simply part of the cost of doing business. However, the debt is still legally valid, and the creditor can attempt to collect the full amount. This includes contacts from internal collections staff, or more likely, an outside collection agency. If the amount is large (generally over $1500 - $2000), there is the possibility of a lawsuit or arbitration. In the US, as the charge off number climbs or becomes erratic, officials from the Federal Reserve take a close look at the finances of the bank and may impose various operating strictures on the bank, and in the most extreme cases, may close the bank entirely.

Rewards

Qantas Frequent Flyer co-branded credit cardsMany credit card customers receive rewards, such as frequent flier points, gift certificates, or cash back as an incentive to use the card. Rewards are generally tied to purchasing an item or service on the card, which may or may not include balance transfers, cash advances, or other special uses. Depending on the type of card, rewards will generally cost the issuer between 0.25% and 2.0% of the spend. Networks like Visa or MasterCard have increased their fees to allow issuers to fund their rewards system. However, most rewards points are accrued as a liability on a company's balance sheet and expensed at the time of reward redemption. As a result, some issuers discourage redemption by forcing the cardholder to call customer service for rewards. On their servicing website, redeeming awards is usually a feature that is very well hidden by the issuers. Others encourage redemption for lower cost merchandise; instead of an airline ticket, which is very expensive to an issuer, the cardholder may be encouraged to redeem for a gift certificate instead. With a fractured and competitive environment, rewards points cut dramatically into an issuer's bottom line, and rewards points and related incentives must be carefully managed to ensure a profitable portfolio. There is a case to be made that rewards not redeemed should follow the same path as gift cards that are not used: in certain states the gift card breakage goes to the state's treasury. The same could happen to the value of points or cash not redeemed.

Fraud

Where a card is stolen, or an unauthorized duplicate made, most card issuers will refund some or all of the charges that the customer has received for things they did not buy. These refunds will, in some cases, be at the expense of the merchant, especially in mail order cases where the merchant cannot claim sight of the card. In several countries, merchants will lose the money if no ID card was asked for, therefore merchants usually require ID card in these countries. The cost of fraud is high; in the UK in 2004 it was over £500 million.[10] Credit card companies generally guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays their credit card bill. "Soft fraud" is fraud committed by the customer himself: getting a card and using it with no intention ever to repay the balance. Such customers are called "diabolicals" by the credit card companies, that try to avoid them at all cost.

Security

An additional feature to secure the creditcard transaction and prohibit the use of a lost creditcard is the MobiClear solution. Each transaction is authenticated through a call to the user mobile phone. The transaction is released once the transaction has been confirmed by the cardholder pushing his/her pincode during the call.
Revenues

Offsetting costs are the following revenues:

Interchange fees

Interchange fees are charged by the merchant's acquirer to a card-accepting merchant as component of the so-called merchant discount rate (also referred to as "merchant service fee"). The merchant pays a merchant discount fee that is typically 2 to 3 percent (this is negotiated, but will vary not only from merchant to merchant, but also from card to card, with business cards and rewards cards generally costing the merchants more to process), which is why some merchants prefer cash, debit cards, or even cheques. The majority of this fee, called the interchange fee, goes to the issuing bank, but parts of it go to the processing network, the card association (American Express, Visa, MasterCard, etc.), and the merchant's acquirer. With a corporate card, the interchange is also often shared by the company in whose name the card is issued as an incentive to use that issuer's card instead of someone else's.

The interchange fee that applies to a particular merchant is a function of many variables including the type of merchant, the merchant's average transaction amount, whether the cards are physically present, if the card's magnetic stripe is read or if the transaction is hand-keyed or entered on a website, the specific type of card, when the transaction is settled, the authorized and settled transaction amounts, etc. For a typical credit card issuer, interchange fee revenues may represent about fifteen percent of total revenues, but this will vary greatly with the type of customers represented in their portfolio. Customers who carry high balances may generate low interchange revenue due to credit line limitations, while customers who use their cards for business and spend hundreds of thousands of dollars a year on their cards while paying off balances every month will have very healthy interchange revenues.

Industry jargon for customer categories
Customers who do not pay in full the amount owed on their monthly statement (the "balance") by the due date (that is, at the end of the "grace period") and are not in a promotional period owe interest ("finance charges") are known in the industry as "revolvers." Those who pay in full (pay the entire balance) are known in the industry as "transactors," "convenience users," or "deadbeats." Those that shift usage of their credit cards or transfer balances frequently are known in the industry as "rate surfers", "rate tarts" or "gamers."

Interest on outstanding balances
Interest charges vary widely from card issuer to card issuer. Often, there are "teaser" rates in effect for initial periods of time (as low as zero percent for, say, six months), whereas regular rates can be as high as 40 percent. In the U.S. there's no federal limit on the interest or late fees credit card issuers can charge; the interest rates are set by the states, with some states, like South Dakota, having no ceiling on interest rates and fees, inviting some banks to establish their credit card operations there. Other states, like Delaware, have very weak usury laws. The teaser rate no longer applies if the customer doesn't pay his bills on time, and is replaced by a penalty interest rate (for example, 24.99%) that applies retroactively. So customers should be wary of these offers, that usually contain some traps. Cash withdrawals will never carry the teaser rate, for example. Note that for some banks, even if you had paid it off an outstanding balance along with interest fees, for the next two months, they will also charge you interest rates for anything you had purchased.[citation needed]

Fees charged to customers The major fees are for:

Late payments

Charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake), called overlimit fees Returned cheque fees or payment processing fees (eg phone payment fee) Cash advances and convenience cheques (often 3% of the amount)[11]. Transactions in a foreign currency (as much as 3% of the amount). A few financial institutions do not charge a fee for this. Membership fees (annual or monthly), sometimes a percentage of the credit limit. Issuers love monthly fees as it allows them to charge substantial amounts without the customer realizing how expensive the charge really is (a monthly amount is perceived as half the price of the equivalent annual fee)[citation needed] Foreign Exchange Premium

Neutral consumer resources

Canada

The Government of Canada maintains a database of the fees, features, interest rates and reward programs of nearly 200 credit cards available in Canada. This database is updated on a quarterly basis with information supplied by the credit card issuing companies. Information in the database is published every quarter on the website of the Financial Consumer Agency of Canada (FCAC).

Information in the database is published in two formats. It is available in PDF comparison tables that break down the information according to type of credit card, allowing the reader to compare the features of, for example, all the student credit cards in the database. The database also feeds into an interactive tool on the FCAC website.[1] The interactive tool uses several interview-type questions to build a profile of the user's credit card usage habits and needs, eliminating unsuitable choices based on the profile, so that the user is presented with a small number of credit cards and the ability to carry out detailed comparisons of features, reward programs, interest rates, etc.
History

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 using a card for purchases was invented in 1887 by Edward Bellamy[citation needed] and described in his utopian novel Looking Backward. Bellamy uses the explicit term "Credit Card" eleven times in his novel (Chapters 9, 10, 11, 13, 25 and 26) and 3 times (Chapters 4, 8 and 19) in its sequel, Equality. The concept of paying merchants using a card was invented in 1950 by Ralph Schneider and Frank X. McNamara in order 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, which is similar but required the entire bill to be paid with each statement; it was followed shortly thereafter by American Express and Carte Blanche. Western Union had begun issuing charge cards to its frequent customers in 1914. 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 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 US. 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, like Carte bleue, or the EC-card (Germany, France, Switzerland, among many 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 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 being related to the Customer's usage of the card. 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.

Controversy

There is some controversy about credit card usage in recent years. Credit card debt has soared, particularly among young people. 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 recent study by United College Marketing Services has shown that student credit lines have increased to over $6,000. Credit card usage has tripled since 2001 amongst teenagers as well. 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. A 2006 documentary film titled Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders deals with this subject in detail.[12] According to Larry Chiang of United College Marketing Services, an example of a credit card class action was where issuers were "rolling back" posting times to extract more late fees.[citation needed] 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: US$405 million
Bank One: US$40 million
Chase: US$22.2 million
Citibank: US$15.5 million

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. Universal default allows creditors to periodically check cardholders' credit portfolios to view trade, thus allowing the institution to decrease the credit limit 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 has changed and does not practice this anymore, while others do still. 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 the woes of millions of Americans who 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.[13] 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 neogotiating terms with credit offerers. Some of the nation's influential top credit card issuers, who are among the top fifty corporate contributors to political campaigns, successfully opposed it.

Minimum payments

In the UK, there has recently been increasing concern about the minimum payments required on outstanding credit card balances. Until the mid-1990s the required minimum monthly payment was generally 5% of the outstanding balance, but competition in the last 15 years to attract customers has led to this figure being eroded on the premise that the minimum monthly payment to service a debt will be lower. Typically, credit card companies now only require a monthly minimum payment of between 2% and 3% of the outstanding balance, or a fixed cash fee, whichever is the greater. For example, on a debt of £1,000, the card holder can expect to pay back only £20 - £30 per month. Unfortunately, some people are not aware of how long it can take to repay a debt when only paying the minimum each month. An example of this: by paying 2.5% of the debt each month, while accruing interest at 14% (in line with modern credit card interest rates), it can take over 14 years to pay back an original debt of £1,000, and roughly £10,500 will have been paid back. It has recently been suggested that credit card companies include a warning on their statements discouraging customers from paying only the minimum, however few companies have so far acted upon this. Companies which do include a warning tend not to inform customers how long full repayment will take, i.e., they discourage users from making just minimum payments but do not explain why. Less financially savvy customers may ignore these empty warnings as a result. Starting in 2006, most U.S. credit card companies regulated by the Office of the Comptroller of the Currency have been required to increase customers' minimum payments to cover at least the interest and late fees from the prior statement plus 1% of the outstanding balance. The reason is to avoid a negative amortization situation which may result when the previous 3% minimum was enforced. Negative amortization is when the payment to the creditor fails to cover the amount of interest charged during that period. This causes the consumer's credit card balance to continually increase.

Trailing interest

Trailing interest is an innovative method used to tack on hidden interest fees to a paid balance as consequence for late payment(s). For instance, regardless of whether a cardholder has paid off his or her balance in full (one whole payment rather than smaller, incremental payments), if the entire balance (with or without interest) was not paid by a specific date, interest will be applied to that particular paid balance beginning on the day after the cardholder's accounting period ended, and will continue to be applied (and thus rapidly accumulated, for interest is compounded upon the previous day's balance-plus-interest fee) until the payment is received.

Hidden costs

Merchants pay a negotiated fee -- typically 1-3% for larger merchants and 3-6% for smaller merchants -- to process credit payments. They must also bear the cost of providing a point-of-sale solution to enable the acceptance of card transactions and other card services related expenses. Credit card issuers understand full well that if card holders were aware of and made to pay these additional costs with their purchases it would tend to discourage credit card usage. As a consequence, businesses who accept credit cards often must sign a "merchant agreement" or contract with the acquirer that stipulates that they are not allowed to offer different prices for card and non-card transactions (sometimes referred to as surcharging) despite the additional costs to the business for accepting the cards. The prohibition on surcharging or cash discounts is enforced by law in some countries, although some governments are beginning to lift this restriction (see below).[citations needed] Some critics have observed that this results in what is effectively a hidden expense on all transactions conducted by merchants who accept credit cards since they must build the cost of transaction fees into their overall business expense. Furthermore, cash and other non-credit card using customers are in effect made to subsidize credit card user purchases. The cost of the convenience and protections 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 in part borne by the non-card purchaser. Critics further note that the customers most likely to pay in cash are probably the least able to afford the additional expense, the argument going that card holders are more likely to be affluent and non-card holders less so.[citations needed] A counterargument is that there are also costs to the merchant in other forms of payment. For cash payments these include frequent trips to the bank or use of an armored delivery service, theft, and employee error, such that cash is actually not cheaper for the merchant than credit cards. This argument is probably specious under most circumstances, however, considering that many merchants would offer a discount for cash-paying customers were they allowed, and indeed, do so where it is legal. The fact that laws exist or have existed that prohibit such practices and that the major card issuers strongly discourage such practices can be taken as an indicator that cash transactions do not have as much cost associated with them as credit card transactions.[citations needed]

To illustrate, some companies offer incentives or bonus coupons for using cash, such as Canadian Tire Money. 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[14] 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). The United Kingdom is the world's most credit-card-intensive country, with 67 million credit cards for a population of 59 million people.[15] 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. Regardless of what state one resides in or purchases a product, however, both Visa and MasterCard have publicly stated that surcharges on credit card transactions are against the rules. [16]
There also exists an economic argument that credit card use increases the "velocity" of money in an economy. The result, according to the quantity theory of money, is an effective increase in the money supply, as more money is flowing through the economy at a given time.
Credit card numbering

The numbers found on credit cards have a certain amount of internal structure, and share a common numbering scheme. The card number's prefix, called the Bank Identification Number, is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs. This is the first six digits for Mastercard and Visa cards. The next nine digits are the individual account number, and the final digit is a validity check code. In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and security codes. Not all credit cards have the same sets of extra codes nor do they use the same number of digits.
Credit cards in ATMs

Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the card but many card issuers charge interest on cash advances before they do so on purchases. The interest on cash advances is commonly charged from the date the withdrawal is made, rather than the monthly billing date. Many card issuers levy a commission for cash withdrawals, even if the ATM belongs to the same bank as the card issuer. Merchants do not offer cashback on credit card transactions because they would pay a percentage commission of the additional cash amount to their bank or merchant services provider, thereby making it uneconomical. Many credit card companies will also, when applying payments to a card, do so at the end of a billing cycle, and apply those payments to everything before cash advances. For this reason, many consumers have large cash balances, which have no grace period and incur interest at a rate that is (usually) higher than the purchase rate, and will carry those Credit cards as funding for entrepreneurs Credit cards are a creative, yet often risky way for entrepreneurs to acquire capital for their start ups when more conventional financing is unavailable. It is rumoured that Larry Page and Sergey Brin's start up of Google was financed by credit cards to buy the necessary computers and office equipment, more specifically "a terabyte of memory". [17] Similarly, filmmaker Robert Townsend financed part of Hollywood Shuffle using credit cards.[18] Director Kevin Smith funded Clerks. in part by maxing out several credit cards. Richard Hatch also financed his production of Battlestar Galactica: The Second Coming partly through his credit cards. Famed hedge fund manager Bruce Kovner began his career (and, later on, his firm Caxton Associates) in financial markets by borrowing from his credit card.

Collectible credit cards

Visa's "Happy Shoppers" credit card designA 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.
Charga-Plate

The Charga-Plate is an early predecessor to the credit card. They were issued by large-scale merchants, much like department store credit cards of today. In some cases, they were kept in the store. When an authorized user made a purchase, the clerk retrieved the plate from the store's files and then processed the purchase. This made it possible for stores to allow more specialized employees of their customers to use the cards, in addition to corporate officers and executives, who would normally have expense accounts and corporate credit cards. For example, an art-supply store that opened an account with a research institute might allow graphic artists employed by the institute to buy art supplies for ongoing projects. It would not be necessary for the research firm to issue a credit card to the artist: instead, a supervisor would simply say, "Go to Universal Art Supply and buy those supplies." The employee would go to the store and choose the appropriate supplies, and they would be charged to Central Institute for Research's account.

Transaction steps

2007-11-06T07:16:00.002-08:00

Authorization: When the cardholders pays for the purchase, the merchant performs some risk assessment

and may submit the transaction to the acquirer for authorization. The acquirer verifies with the

issuer—almost instantly—that the card number and transaction amount are both valid, and informs the

merchant on how to proceed. The issuer may provisionally debit the funds from the cardholder's credit

account at this stage.

Batching: After the transaction is authorized it is then stored in a batch, which the merchant sends to

the acquiring bank later to receive payment (usually at the end of the day). Clearing and settlement:

The acquiring bank sends the transactions in the batch through the card association, which debits the

card-issuing bank for the transaction amount, and credits the acquirer for the transaction amount minus

the interchange fee.

Funding: The acquiring bank pays the merchant. The amount the merchant receives is equal to the

transaction amount minus the discount rate charged by the acquiring bank to the merchant for the

service. The entire process, from authorization to funding, usually takes about 2-7 business days.

However, many merchant card processors offer next-day deposits to customers subject to type of banking

account. In the event of a chargeback (when there's an error in processing the transaction or the

cardholder disputes the transaction), the issuer returns the transaction to the acquirer for resolution.

The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or

contest it.

Secured credit cards
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. In some

cases, credit card issuers will offer incentives even on their secured card portfolios. In these cases,

the deposit required may be significantly less than the required credit limit, and can be as low as 10%

of the desired credit limit. This deposit is held in a special savings account. Credit card issuers

offer this as they have noticed that delinquencies were notably reduced when the customer perceives he

has something to lose if he doesn't repay his balance. 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. The advantage of the secured card for an individual with negative or no

credit history is that most companies report regularly to the major credit bureaus. This allows for

rebuilding of positive credit history. Although the deposit is in the hands of the credit card issuer as

security in the event of default by the consumer, the deposit will not be debited simply for missing one

or two payments. Usually the deposit is only used as an offset when the account is closed, either at the

request of the customer or due to severe delinquency (150 to 180 days). This means that an account which

is less than 150 days delinquent will continue to accrue interest and fees, and could result in a

balance which is much higher than the actual credit limit on the card. In these cases the total debt may

far exceed the original deposit and the cardholder not only forfeits 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, however, for people in certain situations, (for

example, after charging off on other credit cards, or people with a long history of delinquency on

various forms of debt), secured cards can often be less expensive in total cost than unsecured credit

cards, even including the security deposit. Sometimes a credit card will be secured by the equity in the

borrower's home.[3][4] This is called a home equity line of credit (HELOC).

Prepaid credit cards

A prepaid credit card is not really a credit card, as no credit is offered by the card issuer: the card

-holder spends money which has been "stored" via a prior deposit by the card-holder or someone else,

such as a parent or employer. However, it carries a credit-card brand (Visa or MasterCard) and can be

used in similar ways. As more consumers require a suitable solution to rebuilding credit, recent changes

have allowed some credit card companies to offer pre-paid credit cards to help rebuild credit. They are

hard to find and have higher APR fees and higher interest costs. After purchasing the card, the

cardholder loads it with any amount of money and then uses the card to spend the money. Prepaid cards

can be issued to minors since there is no credit line involved. The main advantage over secured credit

cards is that you are not required to come up with $500 or more to open an account. Also most secured

credit cards still charge you interest even though you are not actually "borrowing" any money. With

prepaid credit cards you are not charged any interest but you are often charged monthly fees after an

arbitrary time period. Many other fees also usually apply to a prepaid card.[5] Prepaid credit cards are

often marketed to teenagers for shopping online without having their parents complete the transaction.

Because of the many fees that apply to obtaining and using credit-card-branded prepaid cards, the

Financial Consumer Agency of Canada describes them as "an expensive way to spend your own money". The

agency publishes a booklet, "Pre-paid cards", which explains the advantages and disadvantages of this

type of prepaid card.

Features

As well as convenient, accessible credit, credit cards offer consumers an easy way to track expenses,

which is necessary for both monitoring personal expenditures and the tracking of work-related expenses

for taxation and reimbursement purposes. Credit cards are accepted worldwide, and are available with a

large variety of credit limits, repayment arrangement, and other perks (such as rewards schemes in which

points earned by purchasing goods with the card can be redeemed for further goods and services or credit

card cashback). Some countries, such as the United States, the United Kingdom, and France, limit the

amount for which a consumer can be held liable due to fraudulent transactions as a result of a

consumer's credit card being lost or stolen.

Security

A smart card, combining credit card and debit card properties. The 3 by 5 mm security chip embedded in

the card is shown enlarged in the inset. The gold contact pads on the card enable electronic access to

the chip.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 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[citation needed]. 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. 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, a security risk is created. 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. Controlled Payment Numbers are another option for protecting

one's credit card number: they are "alias" numbers linked to one's actual card number, generated as

needed, valid for a relatively short time, with a very low limit, and typically only valid with a single

merchant. The Federal Bureau of Investigation and U.S. Postal Inspection Service are 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, federal officials only prosecute cases exceeding US $5000

in value. 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. The way credit card owners pay off their balances has a

tremendous effect on their credit history. All the information is collected by credit bureaus. The

credit information stays on the credit report, depending on the jurisdiction and the situation, for 1,

2, 5, 7 or even 10 years after the debt is repaid.

Profits and losses

In recent times, credit card portfolios have been very profitable for 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 not to default in large numbers.

Costs

Credit card issuers (banks) have several types of costs:

Interest expenses

Banks generally borrow the money they then lend to their customers. As they receive very low-interest

loans from other firms, they may borrow as much as their customers require, while lending their capital

to other borrowers at higher rates. If the card issuer charges 15% on money lent to users, and it costs

5% to borrow the money to lend, and the balance sits with the cardholder for a year, the issuer earns

10% on the loan. This 5% difference is the "interest expense" and the 10% is the "net interest margin".
Operating costs

This is the cost of running the credit card portfolio, including everything from paying the executives

who run the company to printing the plastics, to mailing the statements, to running the computers that

keep track of every cardholder's balance, to taking the many phone calls which cardholders place to

their issuer, to protecting the customers from fraud rings. Depending on the issuer, marketing programs

are also a significant portion of expenses.

Charge offs

When a consumer becomes severely delinquent on a debt (often at the point of six months without

payment), the creditor may declare the debt to be a charge-off. It will then be listed as such on the

debtor's credit bureau reports (Equifax, for instance, lists "R9" in the "status" column to denote a

charge-off.) It is one of the worst possible items to have on your file. [citation needed] The item will

include relevant dates, and the amount of the bad debt.[9] A charge-off is considered to be "written off

as uncollectable." To banks, bad debts and even fraud are simply part of the cost of doing business.

However, the debt is still legally valid, and the creditor can attempt to collect the full amount. This

includes contacts from internal collections staff, or more likely, an outside collection agency. If the

amount is large (generally over $1500 - $2000), there is the possibility of a lawsuit or arbitration. In

the US, as the charge off number climbs or becomes erratic, officials from the Federal Reserve take a

close look at the finances of the bank and may impose various operating strictures on the bank, and in

the most extreme cases, may close the bank entirely.

Rewards

Qantas Frequent Flyer co-branded credit cardsMany credit card customers receive rewards, such as

frequent flier points, gift certificates, or cash back as an incentive to use the card. Rewards are

generally tied to purchasing an item or service on the card, which may or may not include balance

transfers, cash advances, or other special uses. Depending on the type of card, rewards will generally

cost the issuer between 0.25% and 2.0% of the spend. Networks like Visa or MasterCard have increased

their fees to allow issuers to fund their rewards system. However, most rewards points are accrued as a

liability on a company's balance sheet and expensed at the time of reward redemption. As a result, some

issuers discourage redemption by forcing the cardholder to call customer service for rewards. On their

servicing website, redeeming awards is usually a feature that is very well hidden by the issuers. Others

encourage redemption for lower cost merchandise; instead of an airline ticket, which is very expensive

to an issuer, the cardholder may be encouraged to redeem for a gift certificate instead. With a

fractured and competitive environment, rewards points cut dramatically into an issuer's bottom line, and

rewards points and related incentives must be carefully managed to ensure a profitable portfolio. There

is a case to be made that rewards not redeemed should follow the same path as gift cards that are not

used: in certain states the gift card breakage goes to the state's treasury. The same could happen to

the value of points or cash not redeemed.

Fraud

Where a card is stolen, or an unauthorized duplicate made, most card issuers will refund some or all of

the charges that the customer has received for things they did not buy. These refunds will, in some

cases, be at the expense of the merchant, especially in mail order cases where the merchant cannot claim

sight of the card. In several countries, merchants will lose the money if no ID card was asked for,

therefore merchants usually require ID card in these countries. The cost of fraud is high; in the UK in

2004 it was over £500 million.[10] Credit card companies generally guarantee the merchant will be paid

on legitimate transactions regardless of whether the consumer pays their credit card bill. "Soft fraud"

is fraud committed by the customer himself: getting a card and using it with no intention ever to repay

the balance. Such customers are called "diabolicals" by the credit card companies, that try to avoid

them at all cost.

Security

An additional feature to secure the creditcard transaction and prohibit the use of a lost creditcard is

the MobiClear solution. Each transaction is authenticated through a call to the user mobile phone. The

transaction is released once the transaction has been confirmed by the cardholder pushing his/her

pincode during the call.
Revenues

Offsetting costs are the following revenues:

Interchange fees

Interchange fees are charged by the merchant's acquirer to a card-accepting merchant as component of the

so-called merchant discount rate (also referred to as "merchant service fee"). The merchant pays a

merchant discount fee that is typically 2 to 3 percent (this is negotiated, but will vary not only from

merchant to merchant, but also from card to card, with business cards and rewards cards generally

costing the merchants more to process), which is why some merchants prefer cash, debit cards, or even

cheques. The majority of this fee, called the interchange fee, goes to the issuing bank, but parts of it

go to the processing network, the card association (American Express, Visa, MasterCard, etc.), and the

merchant's acquirer. With a corporate card, the interchange is also often shared by the company in whose

name the card is issued as an incentive to use that issuer's card instead of someone else's.

The interchange fee that applies to a particular merchant is a function of many variables including the

type of merchant, the merchant's average transaction amount, whether the cards are physically present,

if the card's magnetic stripe is read or if the transaction is hand-keyed or entered on a website, the

specific type of card, when the transaction is settled, the authorized and settled transaction amounts,

etc. For a typical credit card issuer, interchange fee revenues may represent about fifteen percent of

total revenues, but this will vary greatly with the type of customers represented in their portfolio.

Customers who carry high balances may generate low interchange revenue due to credit line limitations,

while customers who use their cards for business and spend hundreds of thousands of dollars a year on

their cards while paying off balances every month will have very healthy interchange revenues.

Industry jargon for customer categories
Customers who do not pay in full the amount owed on their monthly statement (the "balance") by the due

date (that is, at the end of the "grace period") and are not in a promotional period owe interest

("finance charges") are known in the industry as "revolvers." Those who pay in full (pay the entire

balance) are known in the industry as "transactors," "convenience users," or "deadbeats." Those that

shift usage of their credit cards or transfer balances frequently are known in the industry as "rate

surfers", "rate tarts" or "gamers."

Interest on outstanding balances
Interest charges vary widely from card issuer to card issuer. Often, there are "teaser" rates in effect

for initial periods of time (as low as zero percent for, say, six months), whereas regular rates can be

as high as 40 percent. In the U.S. there's no federal limit on the interest or late fees credit card

issuers can charge; the interest rates are set by the states, with some states, like South Dakota,

having no ceiling on interest rates and fees, inviting some banks to establish their credit card

operations there. Other states, like Delaware, have very weak usury laws. The teaser rate no longer

applies if the customer doesn't pay his bills on time, and is replaced by a penalty interest rate (for

example, 24.99%) that applies retroactively. So customers should be wary of these offers, that usually

contain some traps. Cash withdrawals will never carry the teaser rate, for example. Note that for some

banks, even if you had paid it off an outstanding balance along with interest fees, for the next two

months, they will also charge you interest rates for anything you had purchased.[citation needed]

Fees charged to customers The major fees are for:

Late payments

Charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake),

called overlimit fees Returned cheque fees or payment processing fees (eg phone payment fee) Cash

advances and convenience cheques (often 3% of the amount)[11]. Transactions in a foreign currency (as

much as 3% of the amount). A few financial institutions do not charge a fee for this. Membership fees

(annual or monthly), sometimes a percentage of the credit limit. Issuers love monthly fees as it allows

them to charge substantial amounts without the customer realizing how expensive the charge really is (a

monthly amount is perceived as half the price of the equivalent annual fee)[citation needed] Foreign

Exchange Premium

Neutral consumer resources

Canada

The Government of Canada maintains a database of the fees, features, interest rates and reward programs

of nearly 200 credit cards available in Canada. This database is updated on a quarterly basis with

information supplied by the credit card issuing companies. Information in the database is published

every quarter on the website of the Financial Consumer Agency of Canada (FCAC).

Information in the database is published in two formats. It is available in PDF comparison tables that

break down the information according to type of credit card, allowing the reader to compare the features

of, for example, all the student credit cards in the database. The database also feeds into an

interactive tool on the FCAC website.[1] The interactive tool uses several interview-type questions to

build a profile of the user's credit card usage habits and needs, eliminating unsuitable choices based

on the profile, so that the user is presented with a small number of credit cards and the ability to

carry out detailed comparisons of features, reward programs, interest rates, etc.
History

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 using a card for purchases was

invented in 1887 by Edward Bellamy[citation needed] and described in his utopian novel Looking Backward.

Bellamy uses the explicit term "Credit Card" eleven times in his novel (Chapters 9, 10, 11, 13, 25 and

26) and 3 times (Chapters 4, 8 and 19) in its sequel, Equality. The concept of paying merchants using a

card was invented in 1950 by Ralph Schneider and Frank X. McNamara in order 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, which is similar but required the entire bill to be paid with each

statement; it was followed shortly thereafter by American Express and Carte Blanche. Western Union had

begun issuing charge cards to its frequent customers in 1914. 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 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

US. 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, like Carte bleue, or the EC-card (Germany, France, Switzerland, among many

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 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 being

related to the Customer's usage of the card. 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.

Controversy

There is some controversy about credit card usage in recent years. Credit card debt has soared,

particularly among young people. 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 recent

study by United College Marketing Services has shown that student credit lines have increased to over

$6,000. Credit card usage has tripled since 2001 amongst teenagers as well. 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. A 2006

documentary film titled Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders deals with

this subject in detail.[12] According to Larry Chiang of United College Marketing Services, an example

of a credit card class action was where issuers were "rolling back" posting times to extract more late

fees.[citation needed] 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: US$405 million
Bank One: US$40 million
Chase: US$22.2 million
Citibank: US$15.5 million

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. Universal default allows creditors to periodically check cardholders'

credit portfolios to view trade, thus allowing the institution to decrease the credit limit 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 has changed and does not practice this

anymore, while others do still. 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 the woes of millions of

Americans who 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.[13] 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 neogotiating terms with credit offerers. Some of the nation's influential

top credit card issuers, who are among the top fifty corporate contributors to political campaigns,

successfully opposed it.

Minimum payments

In the UK, there has recently been increasing concern about the minimum payments required on outstanding

credit card balances. Until the mid-1990s the required minimum monthly payment was generally 5% of the

outstanding balance, but competition in the last 15 years to attract customers has led to this figure

being eroded on the premise that the minimum monthly payment to service a debt will be lower. Typically,

credit card companies now only require a monthly minimum payment of between 2% and 3% of the outstanding

balance, or a fixed cash fee, whichever is the greater. For example, on a debt of £1,000, the card

holder can expect to pay back only £20 - £30 per month. Unfortunately, some people are not aware of how

long it can take to repay a debt when only paying the minimum each month. An example of this: by paying

2.5% of the debt each month, while accruing interest at 14% (in line with modern credit card interest

rates), it can take over 14 years to pay back an original debt of £1,000, and roughly £10,500 will have

been paid back. It has recently been suggested that credit card companies include a warning on their

statements discouraging customers from paying only the minimum, however few companies have so far acted

upon this. Companies which do include a warning tend not to inform customers how long full repayment

will take, i.e., they discourage users from making just minimum payments but do not explain why. Less

financially savvy customers may ignore these empty warnings as a result. Starting in 2006, most U.S.

credit card companies regulated by the Office of the Comptroller of the Currency have been required to

increase customers' minimum payments to cover at least the interest and late fees from the prior

statement plus 1% of the outstanding balance. The reason is to avoid a negative amortization situation

which may result when the previous 3% minimum was enforced. Negative amortization is when the payment to

the creditor fails to cover the amount of interest charged during that period. This causes the

consumer's credit card balance to continually increase.

Trailing interest

Trailing interest is an innovative method used to tack on hidden interest fees to a paid balance as

consequence for late payment(s). For instance, regardless of whether a cardholder has paid off his or

her balance in full (one whole payment rather than smaller, incremental payments), if the entire balance

(with or without interest) was not paid by a specific date, interest will be applied to that particular

paid balance beginning on the day after the cardholder's accounting period ended, and will continue to

be applied (and thus rapidly accumulated, for interest is compounded upon the previous day's balance-

plus-interest fee) until the payment is received.

Hidden costs

Merchants pay a negotiated fee -- typically 1-3% for larger merchants and 3-6% for smaller merchants --

to process credit payments. They must also bear the cost of providing a point-of-sale solution to enable

the acceptance of card transactions and other card services related expenses. Credit card issuers

understand full well that if card holders were aware of and made to pay these additional costs with

their purchases it would tend to discourage credit card usage. As a consequence, businesses who accept

credit cards often must sign a "merchant agreement" or contract with the acquirer that stipulates that

they are not allowed to offer different prices for card and non-card transactions (sometimes referred to

as surcharging) despite the additional costs to the business for accepting the cards. The prohibition on

surcharging or cash discounts is enforced by law in some countries, although some governments are

beginning to lift this restriction (see below).[citations needed] Some critics have observed that this

results in what is effectively a hidden expense on all transactions conducted by merchants who accept

credit cards since they must build the cost of transaction fees into their overall business expense.

Furthermore, cash and other non-credit card using customers are in effect made to subsidize credit card

user purchases. The cost of the convenience and protections 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 in part borne by the non-card purchaser. Critics further note that the

customers most likely to pay in cash are probably the least able to afford the additional expense, the

argument going that card holders are more likely to be affluent and non-card holders less so.[citations

needed] A counterargument is that there are also costs to the merchant in other forms of payment. For

cash payments these include frequent trips to the bank or use of an armored delivery service, theft, and

employee error, such that cash is actually not cheaper for the merchant than credit cards. This argument

is probably specious under most circumstances, however, considering that many merchants would offer a

discount for cash-paying customers were they allowed, and indeed, do so where it is legal. The fact that

laws exist or have existed that prohibit such practices and that the major card issuers strongly

discourage such practices can be taken as an indicator that cash transactions do not have as much cost

associated with them as credit card transactions.[citations needed]

To illustrate, some companies offer incentives or bonus coupons for using cash, such as Canadian Tire

Money. 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[14] 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). The United

Kingdom is the world's most credit-card-intensive country, with 67 million credit cards for a population

of 59 million people.[15] 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. Regardless of what state one resides in or purchases a product, however, both Visa

and MasterCard have publicly stated that surcharges on credit card transactions are against the rules.

[16]
There also exists an economic argument that credit card use increases the "velocity" of money in an

economy. The result, according to the quantity theory of money, is an effective increase in the money

supply, as more money is flowing through the economy at a given time.
Credit card numbering

The numbers found on credit cards have a certain amount of internal structure, and share a common

numbering scheme. The card number's prefix, called the Bank Identification Number, is the sequence of

digits at the beginning of the number that determine the bank to which a credit card number belongs.

This is the first six digits for Mastercard and Visa cards. The next nine digits are the individual

account number, and the final digit is a validity check code. In addition to the main credit card

number, credit cards also carry issue and expiration dates (given to the nearest month), as well as

extra codes such as issue numbers and security codes. Not all credit cards have the same sets of extra

codes nor do they use the same number of digits.
Credit cards in ATMs

Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the

card but many card issuers charge interest on cash advances before they do so on purchases. The interest

on cash advances is commonly charged from the date the withdrawal is made, rather than the monthly

billing date. Many card issuers levy a commission for cash withdrawals, even if the ATM belongs to the

same bank as the card issuer. Merchants do not offer cashback on credit card transactions because they

would pay a percentage commission of the additional cash amount to their bank or merchant services

provider, thereby making it uneconomical. Many credit card companies will also, when applying payments

to a card, do so at the end of a billing cycle, and apply those payments to everything before cash

advances. For this reason, many consumers have large cash balances, which have no grace period and incur

interest at a rate that is (usually) higher than the purchase rate, and will carry those Credit cards as

funding for entrepreneurs Credit cards are a creative, yet often risky way for entrepreneurs to acquire

capital for their start ups when more conventional financing is unavailable. It is rumoured that Larry

Page and Sergey Brin's start up of Google was financed by credit cards to buy the necessary computers

and office equipment, more specifically "a terabyte of memory". [17] Similarly, filmmaker Robert

Townsend financed part of Hollywood Shuffle using credit cards.[18] Director Kevin Smith funded Clerks.

in part by maxing out several credit cards. Richard Hatch also financed his production of Battlestar

Galactica: The Second Coming partly through his credit cards. Famed hedge fund manager Bruce Kovner

began his career (and, later on, his firm Caxton Associates) in financial markets by borrowing from his

credit card.

Collectible credit cards

Visa's "Happy Shoppers" credit card designA 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.
Charga-Plate

The Charga-Plate is an early predecessor to the credit card. They were issued by large-scale merchants,

much like department store credit cards of today. In some cases, they were kept in the store. When an

authorized user made a purchase, the clerk retrieved the plate from the store's files and then processed

the purchase. This made it possible for stores to allow more specialized employees of their customers to

use the cards, in addition to corporate officers and executives, who would normally have expense

accounts and corporate credit cards. For example, an art-supply store that opened an account with a

research institute might allow graphic artists employed by the institute to buy art supplies for ongoing

projects. It would not be necessary for the research firm to issue a credit card to the artist: instead,

a supervisor would simply say, "Go to Universal Art Supply and buy those supplies." The employee would

go to the store and choose the appropriate supplies, and they would be charged to Central Institute for

Research's account.

Identity theft

2007-11-06T07:16:00.001-08:00

This article may contain original research or unverified claims.
Please improve the article by adding references. See the talk page for details. (September 2007)
Globe icon
The examples and perspective in this article or section may not represent a worldwide view of

the subject.
Please improve this article or discuss the issue on the talk page.
Crimes
Classes of crime
Infraction · Misdemeanor · Felony
Summary · Indictable · Hybrid
Against the person
Assault · Battery
Extortion · Harassment
Kidnapping · Identity theft
(Corporate) Manslaughter
Murder · Rape
Robbery
Against property
Arson · Blackmail
Burglary · Deception
Embezzlement · False pretenses
Fraud · Handling
Larceny · Theft
Vandalism
Against the public order
Drug possession
Against the state
Tax evasion
Espionage · Treason
Against justice
Bribery · Misprision of felony
Obstruction · Perjury
Malfeasance in office
Inchoate offenses
Accessory · Attempt
Conspiracy · Incitement
Solicitation · Common purpose
Note: Crimes vary by jurisdiction.
Not all are listed here.

Identity theft is a crime involving illegal usage of another individual's identity.
Contents
[hide]

* 1 Types
* 2 Examples
* 3 Individual identity protection
* 4 Identity protection by organizations
* 5 Legal response
o 5.1 U.S.
o 5.2 UK
o 5.3 Australia
o 5.4 France
* 6 Techniques for obtaining information
* 7 Spread and impact
* 8 Cultural references
* 9 See also
* 10 References
* 11 External links

[edit] Types

According to the non-profit Identity Theft Resource Center, identity theft is sub-divided into four

categories:

* Financial Identity Theft (using another's name and SSN to obtain goods and services)
* Criminal Identity Theft (posing as another when apprehended for a crime)
* Identity Cloning (using another's information to assume his or her identity in daily life)
* Business/Commercial Identity Theft (using another's business name to obtain credit)

Related crimes include illegal immigration, terrorism and espionage. Identity theft may also be a means

of blackmail. There are also cases of identity cloning to attack payment systems, such as obtaining

medical treatment.

[edit] Examples

A classic example of consumer-dependent financial crime occurs when Bob obtains a loan from a financial

institution impersonating Peter. Bob uses Peter's personal identifiers that he has somehow acquired.

These personal identifiers conform with the data retained on Peter by national credit-rating services.

For Bob, these crimes are non self-revealing, although authorities can track Bob down unless he conceals

his mailing address somehow. With consumers being credit-dependent, the onus shifts to them to re-

establish their credit-worthiness with the lending institutions and credit-rating services.

Another example: a criminal legally acquires personal identifiers, and then clones someone to them for

concealment from authorities. Unlike credit-dependent financial crimes, these crimes are non self-

revealing, continuing for an indeterminate amount of time without being detected.

[edit] Individual identity protection

The acquisition of legally attributed personal identifiers is made possible by serious breaches of

privacy. For consumers it is usually due to personal naivete in who they provide their information to or

carelessness in protecting their information from theft (e.g. vehicle break-ins and home invasions).

Guardianship of personal identifiers by consumers is the most common intervention strategy recommended

by the Federal Trade Commission, Canadian Phone Busters and most sites that address "identity theft".

Personal guardianship issues include recommendations on what consumers may do to prevent their

information getting into the wrong hands.

[edit] Identity protection by organizations

In their May 1998 testimony before the United States Senate, the Federal Trade Commission (FTC) dicussed

the sale of Social Security numbers and other personal identifiers by credit-raters and data miners. The

FTC agreed to the industry's self-regulating principles restricting access to information on credit

reports such name, address, Social Security number, etc.[1] According the industry the restrictions vary

according to the category of customer. Credit-rating services gather and disclosure personal and credit

information to a wide business client base.

Governments, in registering sole proprietorships, partnerships and corporations do not make an effort to

determine if the officers listed in the Articles of Incorporation are who they say they are, potentially

allowing criminals access to personal information through credit-rating and data mining services. Other

poor corporate diligence standards include:

* a failure to shred confidential information before throwing it into dumpsters
* the brokerage of personal information to other businesses without ensuring that the purchaser

maintains adequate security controls
* the theft of laptop computers being carried off-site containing vast amounts of personal

information.

If corporate or government organizations do not protect consumer privacy, client confidentiality and

political privacy, the acquisition of personal identifiers to commit unlawful acts will continue to be a

prime target for criminals.[2]

[edit] Legal response

[edit] U.S.

The increase in crimes of identiy theft lead to the drafting of the Identity Theft and Assumption

Deterrence Act.[3] In 1998, The Federal Trade Commission appeared before the United States Senate.[4]

The FTC discussed crimes which exploit consumer credit to commit loan fraud, mortgage fraud, lines-of-

credit fraud, credit card fraud, commodities and services frauds. The Identity Theft and Assumption

Deterrence Act (2003)[ITADA] amended the U.S. Code, s. 1028: "Fraud related to activity in connection

with identification documents, authentication features, and information". The Code now makes possession

of any "means of identification" to "knowingly transfer, possess, or use without lawful authority" a

federal crime, alongside unlawful possession of identification documents.

The Act also provides the Federal Trade Commission with authority to track the number of incidents and

the dollar value of losses. There figures relate mainly to consumer financial crimes and not the broader

range of all identification-based crimes.[5] Punishments for the unlawful use of a "means of

identification" were strengthened in s.1028a, allowing for a consecutive sentence under specific

conditions of a felony violation defined in s. 1028c.

If used to commit another crime in the commission of identity theft in the United States (if charged

federally) include:

* Class B Felony: 6-20 years in Jail and a fine up to $10,000
* Class C Felony: 2-8 years in Jail and a fine up to $10,000

If charges are brought by state or local law enforcement agencies, different penalties apply depending

on the state.

[edit] UK

In the United Kingdom personal data is protected by the Data Protection Act. The Act covers all personal

data which an organization may hold, including names, birthday and anniversary dates, addresses,

telephone numbers, etc.

Under English law (which extends to Wales but not necessarily to Northern Ireland or Scotland), the

deception offenses under the Theft Act 1968 increasingly contend with identity theft situations. In R v

Seward (2005) EWCA Crim 1941[6] the defendant was acting as the "front man" in the use of stolen credit

cards and other documents to obtain goods. He obtained goods to the value of £10,000 for others who are

unlikely ever to be identified. The Court of Appeal considered sentencing policy for deception offenses

involving "identity theft" and concluded that a prison sentence was required. Henriques J. said at para

14:"Identity fraud is a particularly pernicious and prevalent form of dishonesty calling for, in our

judgment, deterrent sentences."

[edit] Australia

In Australia, privacy law is the responsibility of the Office of the Privacy Commissioner.[7]

[edit] France

In France, a person convicted of identity theft can be sentenced up to 5 years in prison and fined up to

€75,000.[1]

[edit] Techniques for obtaining information

* Stealing mail or rummaging through rubbish (dumpster diving)
* Stealing payment or identification cards or the information on them (pickpocketing, "drive-by"

scanning of RF-enabled cards/tags)
* Eavesdropping on public transactions to obtain personal data (shoulder surfing)
* Stealing personal information in computer databases (Trojan horses, hacking)
* Infiltration of organizations that store large amounts of personal information
* Impersonating a trusted organization in an electronic communication (phishing)
* Obtaining castings of fingers for falsifying fingerprint identification.
* browsing social network (MySpace, Facebook, Bebo etc) sites, online for personal details that have

been posted by users
* Simply researching about the victim in government registers, at the internet, Google, and so on.

[edit] Spread and impact

Surveys in the USA from 2003 to 2006 showed a decrease in the total number of victims but an increase in

the total value of identity fraud to US$56.6 billion in 2006. The average fraud per person rose from

$5,249 in 2003 to $6,383 in 2006.[8]

The 2003 survey from the Identity Theft Resource Center found that :

* Only 15% of victims find out about the theft through proactive action taken by a business
* The average time spent by victims resolving the problem is about 40 hours
* 73% of respondents indicated the crime involved the thief acquiring a credit card
* The emotional impact is similar to that of victims of violent crimes

In a widely publicized account,[9] Michelle Brown, a victim of identity fraud, testified before a U.S.

Senate Committee Hearing on Identity Theft. Ms. Brown testified that: "over a year and a half from

January 1998 through July 1999, one individual impersonated me to procure over $50,000 in goods and

services. Not only did she damage my credit, but she escalated her crimes to a level that I never truly

expected: she engaged in drug trafficking. The crime resulted in my erroneous arrest record, a warrant

out for my arrest, and eventually, a prison record when she was booked under my name as an inmate in the

Chicago Federal Prison."

In Australia, identity theft was estimated to be worth between AUS$1billion and AUS$4 billion per annum

in 2001.[10]

In the United Kingdom the Home Office reported that identity fraud costs the UK economy £1.7 billion[11]

although privacy groups object to the validity of these numbers, arguing that they are being used by the

government to push for introduction of national ID cards. [citation needed] Confusion over exactly what

constitutes identity theft has led to claims that statistics may be exaggerated.[12]

[edit] Cultural references
Trivia sections are discouraged under Wikipedia guidelines.
The article could be improved by integrating relevant items and removing inappropriate ones.

The public fascination with impostors has long had an effect on popular culture and extends to modern

literature.

* The story of Michelle Brown has been made into a film.[13]

* In Frederick Forsyth's novel The Day of the Jackal the would-be assassin of General de Gaulle

steals three identities. Firstly, he assumes the identity of a dead child by obtaining the child's birth

certificate and using it to apply for a passport. He also steals the passports of a Danish clergyman and

an American tourist, and disguises himself as each of those persons in turn.

* In the 1995 movie The Net, Sandra Bullock plays a computer consultant whose life is taken over

with the help of computer assisted identity theft.

* In Jonathan Smith's novel Night Windows the action is based on the horrific and real life theft of

Smith's own identity.

* In the webcomic Kevin and Kell the character Danielle Kindle dies and is later "replaced" by a

double from a parallel world. After an attempt at taking over her predecessor's identity, Danielle

Kendall confesses her true nature and gets accepted by the predecessor's family - if not by all the

readers.

* T. Coraghessan Boyle's 2006 novel Talk Talk describes the theft of Dana Halter's identity, and her

and Martin Bridger's chase of the thief across the country.

* In Susan Schaab's novel Wearing the Spider a female attorney gets caught in a web of sexual

harassment, identity theft and political intrigue.

Credit Card Companies

2007-11-06T07:15:00.003-08:00

In 2003, The Wall Street Journal estimated that the credit card industry generated US $500 million in

annual revenue in research and investigation fees paid by consumers and businesses.[citation needed]

This additional revenue offsets some of the costs incurred by credit card issuing and processing

companies' when investigating chargeback claims. Since 2005, credit card fraud in the UK and America has

increased by 350% on average according to Reuters.[citation needed]

Credit card merchant associations, like Visa and Mastercard, and their member banks receive profit from

transaction fees, known in the industry as the "discount rate." The discount rate is a percentage of the

amount of the transaction, with typical merchants receiving discount rates in the range of 2% to 4%.

[citation needed] Merchant associations are thus motivated to pursue policies which increase the

aggregate amount of money transferred by their systems. Many merchants believe this pursuit of revenue

generation reduces the incentive for credit card banks to implement procedures to reduce credit card

crime, particularly since the cost of investigating fraud is usually higher than the cost of a write-

off.[citation needed] However, merchant associations are not assuming these costs; they are instead

passed on to merchants as "chargebacks." This results in substantial additional costs: not only has the

merchant been defrauded for the amount of the transaction, but he is also obligated to pay a chargeback

fee, and to make matters worse, the merchant is not even reimbursed for his transaction fees. [citation

needed]

Merchants have begun to request changes in State and Federal Laws to protect consumers and merchants

from fraud, but the credit card industry has opposed many of the requested laws.[citation needed] In

many cases, merchants have little ability to fight fraud, and must simply accept a certain percentage of

fraud as a cost of doing business.[citation needed]

Because all card-accepting merchants and card-carrying customers are bound by contract law, according to

the agreements they sign with their processing / issuing banks, respectively, State and Federal law has

a smaller role in preventing merchants from being tricked.[citation needed] Payment transfer

associations enact regulatory changes, and issuing / acquiring banks, merchants, and cardholders are

contractually bound to these new regulations.[citation needed]

[edit] The Criminals

In the US, persons that commit credit card crime largely go unpunished and repeatedly victimize

consumers and businesses.[citation needed] The Secret Service handles crimes involving the US money

supply; they have a limit of $150,000 before investigating each crime.[citation needed] Most credit card

criminals know this and keep purchases from any one business below $150,000. With credit card crime

occurring across state lines, criminals often are never prosecuted because the dollar amounts are too

low for local law enforcement to pay for extradition.[citation needed]

[edit] Reporting Credit Card Fraud

If you lose or have had your credit card stolen, you should immediately report it to your card issuer.

Once you report the incident, you are no longer responsible for unauthorized charges made on your card.

In the US, credit card fraud can be reported to the Federal Trade Commission (FTC) and to local and

regional authorities. It is the standing policy of the FTC not to investigate reports where the value of

fraud does not exceed $2000. Local law enforcement may or may not further investigate a credit card

fraud, depending on the amount, type of fraud, and where the fraud originated from.

If you are a merchant and you suspect orders have been placed for your products/services using stolen

credit card information you will need to contact VISA/MC/AMEX/DISCOVER to obtain the issuing bank's

phone number then call the bank to report that you suspect that their customer's credit card information

has been stolen.

[edit] Notes and references

1. ^ http://finance.yahoo.com/q/bc?s=USDGBP=X&t=2y
2. ^ WikiCrimeLine Fraud Act 2006
3. ^ http://creditcards.lovetoknow.com/Credit_Card_Generator

Credit card fraud

2007-11-06T07:15:00.001-08:00

This article needs additional citations for verification.
Please help improve this article by adding reliable references. Unsourced material may be challenged and

removed. (January 2007)
This article may require cleanup to meet Wikipedia's quality standards.
Please improve this article if you can. (February 2006)

Credit card fraud is a wide-ranging term for theft and fraud committed using a credit card or any

similar payment mechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain

goods without paying, or to obtain unauthorized funds from an account. Credit card fraud is also an

adjunct to identity theft.

The cost of credit card fraud reaches into billions of dollars annually. In 2006, fraud in the United

Kingdom alone was estimated at £428 million,[citation needed] or US $750-830 million at prevailing 2006

exchange rates.[1]
Contents
[hide]

* 1 Fraud in England and Wales
* 2 Origins
* 3 Stolen cards
* 4 Compromised accounts
o 4.1 Mail/Internet order fraud
o 4.2 Account takeover
o 4.3 Skimming
o 4.4 Carding
* 5 Credit Card Crime Profits, Losses & Punishment
o 5.1 Losses
o 5.2 Credit Card Companies
o 5.3 The Criminals
* 6 Reporting Credit Card Fraud
* 7 Notes and references
* 8 See also
* 9 External links

[edit] Fraud in England and Wales

The Fraud Act 2006 introduced in the House of Lords in May 2005 reformed the existing statutory offences

of deception. All the deception offences under the Theft Acts 1968-1996 were abolished, although the Act

is drafted in such a way that the case law dealing with offences of deception will still apply. The Act

simplifies the law on fraud and creates three ways of committing the offence of Fraud [2]

* fraud by false representation
* fraud by failing to disclose information
* fraud by abuse of position

[edit] Origins

The fraud begins with either the theft of the physical card or the compromise of data associated with

the account, including the card account number or other information that would routinely and necessarily

be available to a merchant during a legitimate transaction. The compromise can occur by many common

routes and can usually be conducted without tipping off the card holder, the merchant or the bank, at

least until the account is ultimately used for fraud. A simple example is that of a store clerk copying

sales receipts for later use. The rapid growth of credit card use on the Internet has made database

security lapses particularly costly; in some cases, millions of accounts have been compromised.

Stolen cards can be reported quickly by card holders, but a compromised account can be hoarded by a

thief for weeks or months before any fraudulent use, making it difficult to identify the source of the

compromise. The card holder may not discover fraudulent use until receiving a billing statement, which

may be delivered infrequently.

[edit] Stolen cards

When a card is lost or stolen, it remains usable until the holder notifies the bank that the card is

lost; most banks have toll-free telephone numbers with 24-hour support to encourage prompt reporting.

Still, it is possible for a thief to make unauthorized purchases on that card up until the card is

cancelled. In the absence of other security measures, a thief could potentially purchase thousands of

dollars in merchandise or services before the card holder or the bank realize that the card is in the

wrong hands.

In the US, federal law limits the liability of card holders to $50 in the event of theft, regardless of

the amount charged on the card; in practice, many banks will waive even this small payment and simply

remove the fraudulent charges from the customer's account if the customer signs an affidavit confirming

that the charges are indeed fraudulent. Other countries generally have similar laws aimed at protecting

consumers from physical theft of the card.

The only common security measure on all cards is a signature panel, but signatures are relatively easy

to forge. Many merchants will demand to see a picture ID, such as a driver's license, to verify the

identity of the purchaser, and some credit cards include the holder's picture on the card itself. Self-

serve payment systems (gas stations, kiosks, etc.) are common targets for stolen cards, as there is no

way to verify the card holder's identity. A common countermeasure is to require the user to key in some

identifying information, such as the user's ZIP or postal code. This method may deter casual theft of a

card found alone, but if the card holder's wallet is stolen, it may be trivial for the thief to deduce

the information by looking at other items in the wallet. For instance, a US driver license commonly has

the holder's home address and ZIP code printed on it.

Banks have a number of countermeasures at the network level, including sophisticated real-time analysis

that can estimate the probability of fraud based on a number of factors. For example, a large

transaction occurring a great distance from the card holder's home might be flagged as suspicious. The

merchant may be instructed to call the bank for verification, to decline the transaction, or even to

hold the card and refuse to return it to the customer.

[edit] Compromised accounts

Card account information is stored in a number of formats. Account numbers are often embossed or

imprinted on the card, and a magnetic stripe on the back contains the data in machine readable format.

Fields can vary, but the most common include:

* Name of card holder
* Account number
* Expiration date
* Verification/CVV code

Many Web sites have been compromised in the past and theft of credit card data is a major concern for

banks. Data obtained in a theft, like addresses or phone numbers, can be highly useful to a thief as

additional card holder verification.

[edit] Mail/Internet order fraud

The mail and the Internet are major routes for fraud against merchants who sell and ship products, as

well Internet merchants who provide online services. The industry term for catalog order and similar

transactions is "Card Not Present" (CNP), meaning that the card is not physically available for the

merchant to inspect. The merchant must rely on the holder (or someone purporting to be the holder) to

present the information on the card by indirect means, whether by mail, telephone or over the Internet

when the cardholder is not present at the point of sale.

It is difficult for a merchant to verify that the actual card holder is indeed authorizing the purchase.

Shipping companies can guarantee delivery to a location, but they are not required to check

identification and they are usually are not involved in processing payments for the merchandise. A

common preventive measure for merchants is to allow shipment only to an address approved by the

cardholder, and merchant banking systems offer simple methods of verifying this information.

Additionally, smaller transactions generally undergo less scrutiny, and are less likely to be

investigated by either the bank or the merchant, since the cost of research and prosecution usually far

outweighs the loss due to fraud. CNP merchants must take extra precaution against fraud exposure and

associated losses, and they pay higher rates to merchant banks for the privilege of accepting cards.

Anonymous scam artists bet on the fact that many fraud prevention features do not apply in this

environment.

Merchant associations have developed some prevention measures, such as single use card numbers, but

these have not met with much success. Customers expect to be able to use their credit card without any

hassles, and have little incentive to pursue additional security due to laws limiting customer liability

in the event of fraud. Merchants can implement these prevention measures but risk losing business if the

customer chooses not to use the measures.

[edit] Account takeover

There are two types of fraud within the identity theft category, application fraud and account takeover.

Application fraud occurs when criminals use stolen or fake documents to open an account in someone

else's name. Criminals may try to steal documents such as utility bills and bank statements to build up

useful personal information. Alternatively, they may create counterfeit documents.

Account take-over involves a criminal trying to take over another person's account, first by gathering

information about the intended victim, then contacting their bank or credit issuer - masquerading as the

genuine cardholder - asking for mail to be redirected to a new address. The criminal then reports the

card lost and asks for a replacement to be sent. The replacement card is then used fraudulently.

[edit] Skimming

Skimming is the theft of credit card information used in an otherwise legitimate transaction. It is

typically an "inside job" by a dishonest employee of a legitimate merchant, and can be as simple as

photocopying of receipts. More imaginative routes are possible; an episode of The Sopranos showed how a

compromised magnetic stripe reader could store account information for later use. Common scenarios for

skimming are restaurants or bars where the skimmer has possession of the victim's credit card out of

their immediate view. The skimmer will typically use a small keypad to unobtrusively transcribe the 3 or

4 digit Card Security Code which is not present on the magnetic strip. Many instances of skimming have

been reported where the perpetrator has put a device over the card slot of a public cash machine

(Automated teller machine), which reads the magnetic strip as the user unknowingly passes their card

through it. These devices are often used in conjunction with a pinhole camera to read the user's PIN at

the same time.

Skimming is difficult for the typical card holder to detect, but given a large enough sample, it is

fairly easy for the bank to detect. The bank collects a list of all the card holders who have complained

about fraudulent transactions, and then uses data mining to discover relationships among the card

holders and the merchants they use. For example, if many of the customers used one particular merchant,

that merchant's terminals (devices used to authorize transactions) can be directly investigated.

Sophisticated algorithms can also search for known patterns of fraud. Merchants must ensure the physical

security of their terminals, and penalties for merchants can be severe in cases of compromise, ranging

from large fines to complete exclusion from the merchant banking system, which can be a death blow to

businesses such as restaurants which rely on credit card processing.

[edit] Carding

Carding is a term used for a process to verify the validity of stolen card data. The thief presents the

card information on a website that has real-time transaction processing. If the card is processed

successfully, the thief knows that the card is still good. The specific item purchased is immaterial,

and the thief does not need to purchase an actual product; a Web site subscription or charitable

donation would be sufficient. The purchase is usually for a small monetary amount, both to avoid using

the card's credit limit, and also to avoid attracting the bank's attention. A website known to be

susceptible to carding is known as a cardable website.

In the past, carders used to use computer programs called "generators" to produce a sequence of credit

card numbers, and then test them to see which were valid accounts. Another variation would be to take

false card numbers to a location that does not immediately process card numbers, such as a trade show or

special event. However, this process is no longer viable due to widespread requirement by internet

credit card processing systems for additional data such as the billing address, the 3 to 4 digit Card

Security Code and/or the card's expiry date, as well as the more prevalent use of wireless card scanners

that can process transactions right away.[3] Nowadays, carding is more typically used to verify credit

card data obtained directly from the victims by Skimming or Phishing.

A set of credit card details that has been verified in this way is known in fraud circles as a phish

(see Phishing). A carder will typically sell data files of phish to other individuals who will carry out

the actual fraud. Market price for a phish ranges from US$1.00 to US$50.00 depending on the type of

card, freshness of the data and credit status of the victim.

[edit] Credit Card Crime Profits, Losses & Punishment
Globe icon
The examples and perspective in this article or section may not represent a worldwide view of

the subject.
Please improve this article or discuss the issue on the talk page.

[edit] Losses
Please help improve this article or section by expanding it.
Further information might be found on the talk page or at requests for expansion. (August 2007)

U.S. Federal Law can hold the cardholder victim responsible for up to $50. Merchants in high-risk

industries, like unattended automated fuel pumps or Internet sales, anticipate a certain amount of

credit card fraud, and set prices accordingly. These higher costs are then passed onto the customer.

Credit card hijacking

2007-11-06T07:14:00.001-08:00

This article or section may contain original research or unverified claims.
Please improve the article by adding references. See the talk page for details. (October 2007)
This does not cite any references or sources. (October 2007)
Please help improve this article by adding citations to reliable sources. Unverifiable material may be

challenged and removed.
This article or section needs to be wikified to meet Wikipedia's quality standards.
Please help improve this article with relevant internal links. (October 2007)

Credit Card Hijacking is the term used when a person’s credit card information is used for undesired

charges for goods or services where the credit card owner has trouble reaserting control. This can occur

in a few major forms.

Credit Card Hijacking by Identity Theft

The first form of credit card hijacking is basically identity theft, which is the deliberate assumption

of another person's identity. Identity theft is usually the result of serious breaches of privacy and

often involves the victim compromising a great deal of financial and personal information allowing the

thief to open up new credit card accounts in the name of the victim.
Credit Card Hijacking by Cancellation Barrier

The second form of credit card hijacking, which most people have fallen victim to[citation needed], is

the continued charging of a person’s credit card for a subscription to goods or services no longer

desired by the credit card owner. This type of credit card hijacking was pioneered by major ISPs, credit

monitoring services and online dating services, is perfectly legal, and is still common today in a wide

range of subscription based goods and services. Credit card hijacking of this type came about as online

subscription based marketers realized that traditional subscription systems, such as the annual

subscriptions that paper magazines use, were an impediment to enrolling customers. A typical dial-up

ISP, at US$24.95 per month, is US$299.40 annually. By breaking the subscription period into small units

like months or quarters, and allowing direct monthly charging of the subscriber’s credit card, the

psychological and economic barriers potential subscribers see are greatly reduced.

The issue which makes one subscription system a hijacking of the credit card is not the mode of entry

into the subscription nor the billing interval, but the marketing organization creating barriers for the

user to easily cancel the subscription. Organizations which use credit card hijacking as part of their

marketing strategy make online registration for the subscription easy, enforce default automatic renewal

policies, and create barriers to halting the subscription. (This is in contrast to traditional

subscription based system such as paper magazines where the subscriber has to periodically proactively

reauthorize the subscription, hence the default is to not renew.) The most common subscription exit

barrier is to not provide any online subscription cancellation mechanism at all, but to instead require

the user to cancel by telephone or by "on-line chats". Such organizations often add the additional

barrier of making any subscription cancellation information difficult for the user to even find, thus

creating an additional delay in the subscription cancellation. This is very common amongst ISP’s, who

know the psychological barrier to making the call, which the subscriber anticipates will be unpleasant,

is very high. It also allows the marketing organization to talk the subscriber into changing their minds

and not cancelling the subscription. Another common subscription cancellation barrier is to have a

relatively long subscription period, a no refund policy, and to require the user upon cancellation to

forfeit all money covering the present subscription period. This is very common amongst online dating

services.

This second form of credit card hijacking was created by marketers who recognized that subscription

based services generally have relatively low periodic billings which will generally go unnoticed on any

given credit card statement. So what happens is that long after the user loses interest in the

subscription, they forget to cancel the subscription and because the periodic billing is so low, they

don’t tend to notice it on their credit card statement.

[edit] Credit Card Hijacking by Negative Option Billing

Negative option billing is the practice of sending goods automatically and billing the recipient unless

the recipient is proactive in declining the goods before they are sent. Negative option billing reverses

the usual direcion of sales transactions. It assumes that unless you say 'no', you've agreed to have

bought the goods. This is the common practice used in book clubs, record clubs, and magazine

subscriptions with automatic renewal. Some practitioners of negative option billing prefer to call it

"advance consent marketing."

Cardholder

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Cardholder: The owner of the card used to make a purchase; the consumer. Card-issuing bank: The

financial institution or other organization that issued the credit card to the cardholder. This bank

bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express

and Discover were previously the only card-issuing banks for their respective brands, but as of 2007,

this is no longer the case. Merchant: The individual or business accepting credit card payments for

products or services sold to the cardholder
Acquiring bank: The financial institution accepting payment for the products or services on behalf of

the merchant.

Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.
Merchant account provider: This could refer to the acquiring bank or the independent sales organization,

but in general is the organization that the merchant deals with. Credit Card association: An association

of card-issuing banks such as Visa, MasterCard, Discover, American Express, etc. that set transaction

terms for merchants, card-issuing banks, and acquiring banks.
Transaction network: The system that implements the mechanics of the electronic transactions. May be

operated by an independent company, and one company may operate multiple networks. Transaction

processing networks include: Cardnet, Nabanco, Omaha, Paymentech, NDC Atlanta, Nova, Vital, Concord

EFSnet, and VisaNet
Affinity partner: Some institutions lend their name to an issuer to attract customers that have a strong

relationship with that institution, and get paid a fee or a percentage of the balance for each card

issued using their name. Examples of typical affinity partners are sports teams, universities and

charities.

The flow of information and money between these parties — always through the card associations — is

known as the interchange, and it consists of a few steps.

How credit cards work

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CREDIT CARD

A credit card is a system of payment named after the small plastic card issued to users of the system. A

credit card is different from a debit card in that it does not remove money from the user's account

after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the

user). Playboy is also different from a charge card (though this name is sometimes used by the public to

describe credit cards), which requires the balance to 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 credit cards work

An example of the front of a typical credit card: Issuing bank logo EMV chip Hologram Card number Card

brand logo Expiry Date Cardholder's name

An example of the reverse side of a typical credit card: Magnetic Stripe Signature Strip Card Security

Code A user is issued credit after an account has been approved by the credit provider, and is given a

credit card, with which the user will be able to make purchases from merchants accepting that credit

card up to a pre-established credit limit. Often a general bank issues the credit, but sometimes a

captive bank created to issue a particular brand of credit card, such as Chase, Wells Fargo or Bank of

America issues the credit. When a purchase is made, the credit card user agrees to pay the card issuer.

The cardholder indicates their 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 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 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 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 bank 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

and pays it in full, there would be no interest charged. If, however, even $1.00 of the total balance

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 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 that 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,

either to encourage balance transfers from cards of other issuers, or to encourage 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, or even if the issuing bank decides to raise its revenue. 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 of intense competition in the credit card industry, credit providers often offer

incentives such as frequent flier points, gift certificates, or cash back (typically up to 1 percent

based on total purchases) 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 after which a higher

rate is charged. 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.
Grace period

A credit card's grace period is the time the customer has to pay the balance before interest is charged

to the balance. Grace periods vary, but usually range from 20 to 30 days depending on the type of credit

card and the issuing bank. Some policies allow for reinstatement after certain conditions are met.

Usually, if a customer is late paying the balance, finance charges will be calculated and the grace

period does not apply. Finance charge(s) incurred depends on the grace period and balance, with most

credit cards there is no grace period if there's any outstanding balance from the previous billing cycle

or statement (ie. interest is applied on both the previous balance and new transactions). However, there

are some credit cards that will only apply finance charge on the previous or old balance, excluding new

transactions.

The merchant's side

An example of street markets accepting credit cardsFor merchants, a credit card transaction is often

more secure than other forms of payment, such as checks, because the issuing bank commits to pay the

merchant the moment the transaction is authorized, regardless of whether the consumer defaults on their

credit card payment (except for legitimate disputes, which are discussed below, and can result in charge

backs to the merchant). In most cases, cards are even more secure than cash, because they discourage

theft by the merchant's employees. For each purchase, the bank charges a commission (discount fee), to

the merchant for this service and there may be a certain delay before the agreed payment is received by

the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. In

addition, a merchant may be penalized or have their ability to receive payment using that credit card

restricted if there are too many cancellations or reversals of charges as a result of disputes. Some

small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to

compensate for the transaction costs, though this is not always allowed by the credit card consortium.

In some countries, like the Nordic countries, banks guarantee payment on stolen cards only if an ID card

is checked and the ID card number/civic registration number is written down on the receipt together with

the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are

unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and

the passport number will be written down on the receipt, sometimes together with other information. Some

shops use the card's PIN code for identification, and in that case showing an ID card is not necessary.
Parties involved