How They Work

“How Credit Cards Work” In many developed countries, more so the so called “West” (Europe, Australia, Japan and North America), Consumers with this type of cards are still in the minority, but experts say that the majority of U.S.

“How Credit Cards Work”

In many developed countries, more so the so called “West” (Europe, Australia, Japan and North America), Consumers with this type of cards are still in the minority, but experts say that the majority of U.S. citizens have at least one credit card and usually two or three. In the developed world, credit cards have become important sources of identification if you want to rent a car, for example, you really need a major credit card. And used wisely, a credit card can provide convenience and allow you to make purchases with nearly a month to pay for them before finance charges start.  The trend is deviating away from the Credit Cards to the Debit Cards.  We shall look at the Debit cards at a later stage.

That sounds good, in theory. But in reality, many consumers may be unable to take advantage of these benefits because they carry a balance on their credit card from month to month, paying finance charges that can go up to a whopping 23 percent. Many find it hard to resist using the old “plastic” for impulse purchases or buying things they really can’t afford or don not need altogether!  The numbers are striking: In 1999, American consumers charged about $1.2 trillion on their general-purpose credit cards. Let us look at how it works both financially and technically; and maybe we can offer tips on how to shop for a credit card. (Experts say this should be a project on the scale of shopping for a car loan or mortgage!) We’ll also describe the different credit-card plans available, and how that might affect your card options, and discuss how to avoid credit-card fraud both online and in the real world.

A credit card is a thin plastic card, about 8cm by 5.3cm in size that contains identification information such as a signature or picture, and authorizes the person named on it to charge purchases or services to his account charges for which he will be billed periodically. Today, the information on the card is read by automated teller machines (ATMs), store readers, and bank and Internet computers. Basically, the use of credit cards originated in the United States during the 1920s, when individual companies, such as hotel chains and oil companies, began issuing them to customers for purchases made at those businesses. This use increased significantly after World War II. The first universal credit card one that could be used at a variety of stores and businesses was introduced by Diners Club, Inc., in 1950. With this system, the credit-card company charged cardholders an annual fee and billed them on a monthly or yearly basis. Another major universal card “Don’t leave home without it!” was established in 1958

by the American Express company.

Later came the bank credit-card system. Under this plan, the bank credits the account of the merchant as sales slips are received (this means merchants are paid quickly something they love!) and assembles charges to be billed to the cardholder at the end of the billing period. The cardholder, in turn, pays the bank either the entire balance or in monthly instalments with interest (sometimes called carrying charges).The first national bank plan was Bank America card, which was started on a state wide basis in 1959 by the Bank of America in California. This system was licensed in other states starting in 1966, and was renamed Visa in 1976. Other major bank cards followed, including MasterCard, formerly Master Charge. In order to offer expanded services, such as meals and lodging, many smaller banks that earlier offered credit cards on a local or regional basis formed relationships with large national or international banks.

(To be Continued)

 

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