Credit Card | Understand the Details

A credit card is a payment card issued to individuals (cardholders) that enables them to pay a merchant for goods and services on the basis of accrued debt. In practice, this means the cardholder is promising the card issuer—typically a bank or credit union—that they will repay the amounts spent, along with any interest or other agreed charges.

The card issuer sets up a revolving account and grants the cardholder a line of credit, which the user can draw upon for purchases or even as a cash advance. Broadly, there are two main categories of credit cards:

1. Consumer credit cards – designed for individuals and households.

2. Business credit cards – issued to businesses and organisations, generally with higher limits and specialist features.

While most cards today are still made of plastic, premium versions are manufactured using metal such as stainless steel, titanium, palladium, or even gold. In rare cases, exclusive cards may be gemstone-encrusted metal cards, highlighting status as well as function.

Credit Card

Credit Cards vs Charge Cards

It is important to distinguish between a credit card and a charge card:

• Credit cards allow cardholders to carry a continuing balance of debt, rolling it over month to month, though subject to interest charges.

• Charge cards, by contrast, require the balance to be repaid in full each month or at the end of each statement cycle.

Another key difference is the role of a third-party entity. A credit card usually involves a bank or issuer paying the merchant immediately, while the buyer repays the bank later. A charge card merely defers payment from buyer to merchant until a set date, without the same credit arrangement.

Credit Cards vs Debit Cards

A credit card also differs from a debit card. A debit card allows the owner to pay directly using money already in their account. A credit card, however, enables borrowing against a line of credit, with repayment required later.

As of 2018, there were an estimated 1.12 billion credit cards in circulation in the United States, with approximately 72% of adults holding at least one card.

Technical Specifications of Credit Cards

Modern credit cards are designed according to international standards to ensure consistency and usability worldwide.

• Size and Shape:
  The standard size of most credit cards is 85.60 by 53.98 millimetres (3⅜ in × 2⅛ in), with rounded corners of 2.88–3.48 millimetres radius. This conforms to the ISO/IEC 7810 ID-1 standard, the same as ATM cards and debit cards.

• Card Numbering:
  Credit cards display a unique number either printed or embossed, in line with the ISO/IEC 7812 numbering standard.

  • The first six digits form the Bank Identification Number (BIN), identifying the issuing bank (for example, Visa or MasterCard).

  • The following nine digits represent the individual account number.

  • The final digit serves as a validity check digit.

• Magnetic Stripe and Chips:
  Credit cards feature a magnetic stripe compliant with ISO/IEC 7813. Most modern cards also employ smart card technology—an embedded computer chip—for enhanced security. Increasingly, complex smart cards with keypads, displays, or even biometric fingerprint sensors are being introduced.

• Additional Features:
  Cards include an issue date and expiration date (usually specified by month and year), as well as security features such as CVV codes or issue numbers. Advanced smart cards may generate a variable security code for each transaction, greatly improving protection during online payments.

• Embossing and Design Trends:
  Originally, card numbers and names were embossed to facilitate transfer onto carbon paper sales slips. With the decline of such slips, embossing is no longer essential. Many modern cards no longer display numbers on the front, opting instead for vertical designs with details printed or stored digitally.

History of the Credit Card

Literary Origins: Edward Bellamy’s Looking Backward (1887)

The idea of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. Bellamy used the term “credit card” eleven times, but his card represented a way to spend a citizen’s government dividend, not borrowed funds. In that respect, Bellamy’s concept functioned more like a debit mechanism (spending pre-existing value) than modern revolving credit.

Charge Coins, Medals, and Similar Tokens (Late 19th Century–1930s)

From the late 1800s to the 1930s, merchants issued charge coins and related tokens to customers who held store charge accounts (e.g., department stores, hotels).

• Materials & form: They appeared in various shapes and sizes, made from celluloid (an early plastic), copper, aluminium, steel, and other whitish metals. Most had a small hole so they could be attached to a key ring.
• Markings: A typical charge coin displayed the charge account number, the merchant’s name, and a logo.
• Imprinting & speed: The coin could be imprinted onto a sales slip, allowing rapid and standardised copying of account numbers—faster and far less error-prone than handwriting, which varied by clerk.
• Risk: Because the customer’s name did not appear on the coin, anyone holding it could attempt to use it, leading to mistaken identity or fraud (malicious misuse or unauthorised use on behalf of the account owner).
• Transition: From the 1930s, merchants began moving away from charge coins towards the Charge-Plate, a more robust, data-rich format.

Early Charge Cards: The Charge-Plate (1928; 1930s–Late 1950s)

The Charge-Plate (a trademark of Farrington Manufacturing Co.) was developed in 1928 and used in the United States from the 1930s to the late 1950s.

• Form factor: A 2½ × 1¼ inch (64 mm × 32 mm) sheet-metal rectangle, related to Addressograph and military dog tag systems.
• Embossed details: It bore the customer’s name, city, and state embossed on the plate.
• Signature card: The reverse held a small paper card for the customer’s signature.
• Imprinting process: For each purchase, the plate sat in a recessed imprinter with a paper charge slip above it; the imprinter pressed an inked ribbon against the slip, producing an impression of the embossed information.
• Issuance & custody: Large merchants issued Charge-Plates to regular customers (analogous to modern store cards). In some cases, stores kept the plates on file rather than giving them to customers; clerks retrieved the plate for authorised users at the point of sale.
• Operational benefit: Charge-Plates sped up bookkeeping and reduced copying errors in the manual paper ledgers commonly used in-store at the time.

The Air Travel Card (1934; Towards International Validity by 1948)

In 1934, American Airlines and the Air Transport Association introduced the Air Travel Card, further simplifying charging and settlement for air tickets.

• Numbering scheme: They designed a scheme identifying both the issuer and the customer account—which is why modern UATP cards still begin with the digit “1”.
• “Buy now, pay later”: Passengers could charge tickets against their credit and receive a 15% discount at participating airlines.
• Adoption: By the 1940s, all major U.S. airlines offered Air Travel Cards, accepted across 17 airlines. By 1941, approximately half of airline revenues flowed through this agreement. Airlines also offered instalment plans to attract new travellers.
• International milestone: In 1948, the Air Travel Card became the first internationally valid charge card for all members of the International Air Transport Association (IATA).

Early General-Purpose Charge Cards: Diners Club, Carte Blanche, American Express (1950s)

The notion that one card could be used at multiple, unrelated merchants crystallised in 1950 when Ralph Schneider and Frank McNamara founded Diners Club (partly through merging with Dine and Sign).

• General-purpose innovation: Diners Club produced the first widely adopted “general purpose” charge card, consolidating multiple merchant cards into a single instrument.
• Repayment rule: Cardholders were required to pay the entire bill with each statement (i.e., no revolving balance).
• Subsequent entrants: Carte Blanche followed, and in 1958 American Express launched a network that would become worldwide. Although initially charge cards, these products later added features associated with credit cards (e.g., broader payment options and, in time, revolving structures in some markets).

BankAmericard and Master Charge: The Rise of Modern Credit Cards

The Challenge Before 1958

Until the late 1950s, no financial institution had successfully created a revolving credit system in which a third-party bank card was accepted widely by merchants.

• Merchant-issued revolving cards existed, but these were typically accepted only by a handful of associated shops.
• Several small American banks attempted to launch bank cards, yet all failed within a short period because they could not establish a broad acceptance network.

The critical obstacle was the “chicken-and-egg” dilemma:

• Consumers resisted adopting cards not widely accepted.
• Merchants, in turn, refused to accept cards that few consumers carried.

BankAmericard (1958): Breaking the Deadlock

In 1958, Bank of America introduced the BankAmericard in Fresno, California, creating what is now recognised as the first modern credit card.

• Strategic launch: Fresno was selected because 45% of residents already banked with Bank of America. By mailing cards simultaneously to 60,000 residents, the bank achieved critical mass—ensuring both consumer adoption and merchant acceptance.
• Expansion: Once successful in Fresno, the system was licensed to other banks across the United States, and eventually abroad.
• Rebranding: In 1976, all BankAmericard licensees united under a single global brand: Visa.

The Emergence of Master Charge (1966–1969)

To compete with BankAmericard, a group of banks formed Master Charge in 1966.

• The product gained significant traction when Citibank merged its own Everything Card (launched in 1967) into Master Charge in 1969.
• Over time, Master Charge evolved into MasterCard, becoming Visa’s primary competitor in the global card payments industry.

Mass Mailing and the “Drops” Crisis (1960s)

Early U.S. credit card expansion relied on mass-produced, unsolicited cards being posted directly to consumers thought to be reliable credit risks.

• In practice, these cards were also sent to unemployed individuals, alcoholics, narcotics addicts, and compulsive debtors.
• Betty Furness, President Johnson’s Special Assistant, likened the practice to “giving sugar to diabetics”.
• These mailings, known as “drops” in banking terminology, created financial chaos.
• By the time the practice was outlawed in 1970, approximately 100 million credit cards had already been distributed to the American public.
• After 1970, banks were permitted to send only credit card applications unsolicited, not actual cards.

The Impact of Computerisation (1973)

Prior to the computerisation of card systems, every credit card transaction was cumbersome:

• Merchants had to telephone their bank, which then had to call the card company, where a staff member would manually check the customer’s name and balance.
• This labour-intensive process delayed sales and discouraged some merchants from fully embracing cards.

In 1973, under the leadership of Dee Hock (the first CEO of Visa), card processing was computerised:

• Authorisation times dropped to less than one minute, transforming consumer convenience and merchant confidence.
• This innovation paved the way for the real-time electronic payment systems that became common by the early 21st century.

Fraud and Merchant Responsibility Pre-Digital Era

Even with computerisation, security challenges persisted.

• Always-connected payment terminals did not become common until the 2000s.
• In earlier decades, many merchants—especially for small transactions or trusted customers—simply approved charges without verification.
• Lists of stolen card numbers were distributed to merchants, who were expected to check them manually and confirm signatures.
• Merchants who neglected these checks were held liable for fraudulent charges. Yet, because the procedures were so cumbersome, many merchants skipped them entirely, accepting the risk of fraud as a cost of doing business.

Development Outside North America

The Context: U.S. Banking Restrictions and Global Spread

The Glass–Steagall Act created a fractured American banking system, which ironically accelerated the spread of credit cards. For many Americans travelling across state lines, credit cards provided a practical way to transfer credit where local banking facilities were unavailable.

This innovation soon spread internationally, giving rise to countless variations on the revolving credit model:

• Organisation-branded credit cards (affiliated with universities, sports clubs, charities, etc.)
• Corporate user credit cards for businesses and employees
• Retail and store cards tied to specific merchants
• Co-branded and affinity cards, backed by financial institutions but marketed through commercial or social partners

The First Non-U.S. Card: Barclaycard (1966)

In 1966, Barclaycard launched in the United Kingdom, becoming the first credit card issued outside the United States.

• It marked a turning point for global adoption.
• By the late 20th century, credit cards had reached very high penetration in the U.S., Canada, and the U.K., where they became the standard form of consumer credit.

Slow Adoption in Cash-Oriented Cultures

In contrast, many other regions were slow to embrace credit cards due to cultural, regulatory, or financial system differences:

• Continental Europe: Countries such as France, Germany, and Switzerland adopted alternatives like Carte Bleue or Eurocard, reflecting different banking traditions.
• France: Strict overdraft regulations encouraged the early adoption of chip-based credit cards, widely considered an anti-fraud innovation.
• Japan: Remains heavily cash-oriented, with card use limited mostly to large merchants. Stored-value systems (e.g., telephone cards) became popular, and later, RFID-based payment solutions integrated into cards and mobile phones.

Rise of Alternative Cashless Systems

Even where credit cards were available, other payment innovations often took precedence:

• Debit cards gained more popularity for day-to-day transactions.
• Online banking and ATMs expanded access to funds without credit dependence.
• Mobile banking and installment plans (particularly in Asia and Latin America) became widespread.

It was not until the 1990s that some countries approached U.S. or U.K. penetration levels. In several cases, nations established their own credit card networks, such as:

• Bankcard in Australia
• Barclaycard’s independent network in the U.K.

Credit Card Design and Collectibility

In addition to financial use, the design of credit cards themselves has become a selling point—and even a collectible field.

• Early cards were made from celluloid plastic, metal, or fibre, later shifting to paper and now predominantly PVC plastic.
• Modern smart chips, however, are metallic, reflecting the integration of microelectronics.
• Credit card design is now a focus of marketing strategy, offering premium finishes such as metal cards (titanium, stainless steel, palladium) or limited-edition designs.

Collectors and Exonumia

Credit cards are now considered part of exonumia (money-like objects) in numismatics. Collectors seek:

• Early paper merchant cards
• Metal tokens used as merchant credit cards
• Vintage plastic cards from the mid-20th century
• Receipts and imprints, such as those from carbon-copy imprinters (common until the late 1990s), which capture an era of manual credit processing

This growing field highlights the cultural significance of credit cards not only as financial tools but also as objects of design, history, and consumer identity.

Usage of Credit Cards

5.1 Agreements Between Issuers and Merchants

Credit card usage depends on contractual agreements:

• Issuing institutions such as banks, credit unions, or independent card networks (e.g., Visa, MasterCard, American Express) establish terms with merchants.
• Merchants communicate acceptance through logos and signage, menus, or even verbal notification (e.g., “We don’t take credit cards”).

These agreements set transaction standards covering fees, authorisation processes, and settlement rules between merchants, card-issuing banks, and acquiring banks.

5.2 Issuance and Cardholder Responsibilities

Once a credit provider approves an account, a card issuer may issue a physical or digital credit card.

• Use: The cardholder may purchase goods or services at any merchant that accepts that card scheme.
• Obligation: By signing a receipt, entering a Personal Identification Number (PIN), or completing online verification, the cardholder agrees to repay the issuer.
• Card-not-present (CNP) transactions (e-commerce, mail order, or telephone purchases) require additional verification such as:
  • Security code (CVV/CVC)
  • Expiry date
  • Billing address

5.3 Authorisation and Verification

Modern electronic systems allow verification in seconds:

• Data is captured via a magnetic stripe or a chip (the Chip and PIN system in the U.K. and Ireland, compliant with EMV standards).
• A Point-of-Sale (POS) terminal or other payment system communicates with the acquiring bank to confirm:
  1. Card validity
  2. Available credit limit
  3. Transaction type and amount

If successful, an authorisation code is issued, reserving the necessary funds from the cardholder’s credit line.

5.4 Billing Cycle and Statements

Every month, the cardholder receives a statement, which details:

• Purchases made during the billing cycle
• Outstanding fees and interest
• Total balance due
• Minimum payment required

Many issuers now also offer electronic statements, accessible via online banking.

• Customers typically receive an email notification when a new statement is ready.
• Payment options may include:
  • Physical cheque
  • Electronic funds transfer
  • Multiple payments within a billing cycle (allowing the cardholder to re-use available credit more efficiently).

Right to Dispute

In the U.S., cardholders can dispute charges under the Fair Credit Billing Act. Liability for unauthorised transactions is limited to $50 (15 U.S.C. § 1643).

5.5 Minimum Payment Requirements

Cardholders must pay at least the minimum due amount each month.

• If the full balance is not cleared, interest is charged on the remaining sum, typically at a higher rate than many other forms of debt.
• Failure to meet the minimum payment by the due date may result in:
  • Late fees
  • Higher penalty interest rates
  • Adverse impact on credit records

Some banks allow automatic payments from linked accounts, reducing the risk of late penalties.

Risk of Negative Amortisation

If the minimum payment is less than the finance charges, the balance can actually grow rather than shrink—a phenomenon known as negative amortisation.

• This increases the lender’s credit risk.
• The practice has been banned in the U.S. since 2003 for consumer protection reasons.

5.6 Marketing, Solicitation, and Approval

Credit card promotion is heavily regulated:

• In the U.S., the Schumer Box format requires standardised disclosure of rates and fees in all advertisements.
• A large share of junk mail consists of unsolicited card offers.
• The three major U.S. credit bureaus—Equifax, TransUnion, and Experian—compile and sell consumer lists for these campaigns.

Consumer Rights

To reduce unwanted solicitations, U.S. consumers may opt out through the Opt Out Pre-Screen programme, which prevents their data from being sold for card marketing purposes.

Interest Charges and Grace Periods

6.1 Interest Charges

Credit card interest charges represent one of the most significant costs for cardholders who do not pay their balances in full each month.

• Waiver of interest: Most issuers waive interest if the balance is paid in full within the billing cycle. For example, if a user makes a £1,000 purchase and repays the full amount within the grace period, no interest is charged.
• Full interest on partial balances: If even £1 remains unpaid, interest is applied to the entire £1,000 balance from the original date of purchase until the outstanding amount is cleared.

The specific method of calculating interest is explained in the cardholder agreement and often summarised on the monthly statement.

General Calculation Formula

Most financial institutions calculate interest using the following formula:

Interest=(APR/100×ADB)365×Number of Days Revolved\text{Interest} = \frac{(\text{APR}/100 \times \text{ADB})}{365} \times \text{Number of Days Revolved}Interest=365(APR/100×ADB)​×Number of Days Revolved

Where:

• APR = Annual Percentage Rate
• ADB = Average Daily Balance

Example: If the APR is 20% and the ADB is £1,000, then:

• 20 ÷ 100 = 0.20
• 0.20 × £1,000 = £200
• £200 ÷ 365 ≈ £0.55 per day
• If revolved for 30 days → £16.50 interest

This calculation underpins what issuers call the Residual Retail Finance Charge (RRFC). Even after a payment is made, cardholders may still see further interest charges on the next statement, covering the period between the last payment and the point when the balance ceased revolving.

Multiple Balance Segments

A credit card may act as a straightforward revolving credit facility or evolve into a complex financial instrument:

• Balance segmentation: Different balances may accrue interest at different rates (e.g., purchases, cash advances, promotional transfers).
• Single or separate limits: Some cards operate with a single umbrella credit limit, while others apply separate limits for each type of balance.
• Promotional offers: Issuers often create segments through special balance transfer deals or introductory rates.

Payment Allocation Practices

The way payments are allocated across different balances is usually at the discretion of the issuing bank. In many cases:

• Payments are applied first to balances with the lowest interest rate,
• Leaving higher-interest balances (such as cash advances) to continue accumulating charges.

This practice increases revenue for issuers and makes it harder for cardholders to eliminate expensive debt.

Variability of Interest Rates

Interest rates can differ widely between cards and can change suddenly:

• Standard differences: APRs may vary from under 10% to more than 30%, depending on card type, risk profile, and market conditions.
• Penalty rates: A late payment on the card (or even on another credit instrument with a different lender) can trigger a dramatic rise in APR.
• Issuer discretion: In some cases, banks may raise rates unilaterally to increase revenue, subject to legal and regulatory frameworks.

6.2 Grace Period

The grace period is the time frame within which a cardholder may pay the balance in full to avoid incurring interest.

• Typical length: Between 20 and 55 days, depending on the card and the issuing bank.
• Application: If the cardholder pays in full by the due date, no interest is charged.

Loss of Grace Period

The grace period is forfeited if:

1. The cardholder carries any outstanding balance from the previous billing cycle, or
2. Payment is made after the due date.

In such cases:

• Most credit cards apply finance charges to both old and new transactions.
• Some cards, however, only apply interest to the outstanding balance, allowing new purchases a fresh grace period.

Reinstatement Policies

Some issuers allow grace periods to be reinstated once certain conditions are met, such as:

• Paying the full outstanding balance, or
• Demonstrating a clean repayment record over subsequent cycles.

Parties Involved in Credit Card Transactions

Credit card transactions are complex operations involving several different stakeholders. Each party plays a distinct role in authorising, processing, and settling payments. Understanding these roles is essential for grasping how modern credit card systems function.

7.1 Key Parties

Cardholder

• The consumer who holds the credit card and uses it to make purchases.

• Responsible for repaying the card-issuing bank for transactions made using the card.

Card-Issuing Bank

• The financial institution that issues the credit card to the cardholder.

• Bills the consumer for repayment and bears the risk of fraudulent use.

• Historically, American Express and Discover were the sole issuers for their networks, but since 2007 other banks have been allowed to issue these cards.

• Offshore credit cards are those issued by banks located in a different country to the cardholder.

Merchant

• The business or individual that accepts credit card payments in exchange for goods or services.

Acquiring Bank

• The financial institution that processes payments on behalf of the merchant.

• Works with card networks to settle transactions into the merchant’s account.

Independent Sales Organisation (ISO)

• A reseller of the acquiring bank’s services.

• Provides merchants with access to credit card processing, often with customised packages.

Merchant Account

• The account through which a merchant receives payments.

• May be directly with an acquiring bank or arranged via an ISO.

Card Association

• A network of card-issuing banks that sets transaction terms and rules.

• Includes Visa, MasterCard, American Express, and Discover.

• Establishes interchange fees, security standards, and compliance protocols.

Transaction Network

• The system that executes electronic payment mechanics.

• Operated by independent companies, with some managing multiple networks simultaneously.

Affinity Partner

• An institution (e.g., university, sports team, charity, retailer) that lends its name to attract customers to a co-branded card.

• Receives a fee or a percentage of balances for each issued card under its name.

Insurance Providers

• Underwrite insurance protections bundled with credit cards, such as:

  • Car rental insurance

  • Purchase protection

  • Hotel burglary insurance

  • Travel medical coverage

7.2 Flow of Information and Money: The Interchange

The interchange refers to the structured flow of data and funds between these parties, always facilitated through the card associations.

It ensures:

1. Merchants receive payment for transactions.

2. Issuers are reimbursed by cardholders.

3. Networks standardise rules and coordinate the exchange.

7.3 Transaction Steps

1. Authorisation

• The cardholder presents the card as payment.

• The merchant submits the transaction to the acquirer.

• The acquirer verifies:

  • Credit card number

  • Transaction type

  • Transaction amount

• The issuer places an authorisation hold on the cardholder’s account, reducing the available credit.

• An approval code is generated and stored with the transaction.

2. Batching

• Authorised transactions are grouped into batches.

• Merchants typically submit these batches once per day, either:

  • Manually: initiated by the merchant, or

  • Automatically: via scheduled payment platforms.

• If a transaction is not submitted in the batch, the authorisation eventually expires, and the held funds are released back to the cardholder.

Exceptions

• Some merchants may submit transactions without prior authorisation:

  • Transactions under the floor limit (below which authorisation is not required).

  • Forced transactions: when the authorisation fails but the merchant proceeds anyway—for example, in hotels or car rentals where a guest extends their stay or rental period.

Clearing, Settlement, and Record-Keeping

Credit card transactions do not end at the authorisation stage. To finalise payments, the processes of clearing and settlement take place, ensuring that merchants are compensated, issuers recover funds, and networks maintain orderly flows. In addition, systems such as chargebacks and personal credit card registers provide mechanisms for dispute resolution and financial tracking.

8.1 Clearing and Settlement

Once the merchant has submitted authorised transactions in a batch:

• The acquirer forwards the batch to the card association (e.g., Visa, MasterCard).

• The card association:

  • Debits the issuer (the cardholder’s bank) for payment, and

  • Credits the acquirer (the merchant’s processing bank).

• In effect, the issuer reimburses the acquirer, who then passes funds to the merchant.

8.2 Funding the Merchant

After settlement, the acquirer transfers payment to the merchant:

• The merchant receives the total batch amount minus processing fees.

• Fees are usually structured in tiers, such as:

  • Discount rate – the lowest fee tier, often applied to standard transactions.

  • Mid-qualified rate – higher fees applied when certain conditions (e.g., card type, processing method) increase risk or cost.

  • Non-qualified rate – the highest fees, often triggered by manually entered data or international transactions.

This tiered pricing model incentivises merchants to adopt practices that reduce risk and processing costs.

8.3 Chargebacks

A chargeback occurs when a transaction is reversed due to a dispute raised by the cardholder. Common reasons include:

• Fraudulent or unauthorised use of the card.

• Goods or services not delivered as promised.

• Clerical errors in billing.

Process:

1. The issuer initiates the chargeback, returning the transaction to the acquirer.

2. The acquirer forwards the dispute to the merchant.

3. The merchant must either:

   • Accept the chargeback (losing the funds), or

   • Contest it by providing evidence (e.g., signed receipts, delivery confirmation).

Chargebacks are a significant risk for merchants, as repeated disputes can lead to higher processing fees, account restrictions, or termination of their ability to accept cards.

8.4 Credit Card Registers

A credit card register is a personal transaction log that helps cardholders track usage, manage authorisation holds, and stay within credit limits.

• Purpose:

  • Reconcile transactions against bank statements.

  • Monitor available credit after each purchase.

  • Budget effectively by recording pending payments and charges.

• Format:

  • The code column identifies which card was used.

  • The balance column shows available funds or remaining credit after each entry.

  • Deposits reflect available credit, while the payment column shows the outstanding balance.

  • The sum of both columns equals the card’s credit limit.

• Practical use:

  • Entries may include cheques, debit card transactions, cash withdrawals, and credit card charges.

  • Manual registers are updated daily or several times a week.

  • For those managing multiple cards, separate registers provide a quick way to check available credit across all accounts.

Thus, credit card registers serve as a simple yet effective budgeting tool, reducing the likelihood of overspending or missing payments.

Features of Credit Cards

Credit cards are not merely tools for borrowing; they also provide a wide range of features and benefits that make them integral to modern personal finance and business expense management.

9.1 Convenience and Expense Tracking

• Ease of use: Credit cards provide consumers with immediate access to credit for everyday purchases, travel, and emergencies.

• Expense monitoring: Monthly statements, often supplemented by online or mobile banking apps, allow cardholders to track:

  • Day-to-day personal expenditures, and

  • Work-related expenses, which can later be submitted for tax deductions or employer reimbursement.

• Global acceptance: Credit cards are accepted by most large merchants worldwide, making them especially useful for international travel.

9.2 Credit Limits and Repayment Options

Credit cards are issued with varying credit limits, tailored to the financial profile of each cardholder. Repayment arrangements may include:

• Minimum payments: Allowing borrowers to carry balances forward, though often at high interest rates.

• Full repayment: Enabling users to avoid interest charges entirely by settling their bill within the grace period.

• Flexible plans: Some issuers allow instalment payments for large purchases, converting credit into a form of structured repayment.

9.3 Added Perks and Benefits

Many cards offer additional incentives to attract and retain customers, such as:

• Insurance protections: Coverage may include travel insurance, car rental insurance, purchase protection, and extended warranties.

• Rewards schemes:

  • Earn points for each purchase, which can be redeemed for goods, services, or travel bookings.

  • Cashback offers, returning a percentage of spending directly to the cardholder.

  • Airline miles or hotel loyalty points linked to travel-focused cards.

These perks not only enhance consumer value but also encourage loyalty to a specific card issuer or brand.

9.4 Consumer Protection and Limited Liability

One of the most important features of credit cards is consumer protection against fraud:

• In countries such as the United States, United Kingdom, and France, laws limit the amount for which a cardholder can be held liable in cases of fraudulent transactions on lost or stolen cards.

• Typically, liability is capped at a nominal amount (e.g., $50 in the U.S., or £50 in the U.K.), and in many cases issuers waive even this responsibility.

• These protections have made credit cards safer to use than carrying large amounts of cash, boosting consumer confidence in card-based payments.

Specialised Types of Credit Cards

In addition to standard consumer credit cards, several specialised card types exist to serve distinct financial needs. These include business credit cards, secured cards, prepaid cards, and charge cards. Each type carries unique features, advantages, and potential drawbacks.

10.1 Business Credit Cards

Business credit cards are issued in the name of a registered business and are intended exclusively for business-related expenses.

• Growth in use: In 1998, around 37% of small businesses in the U.S. reported using business credit cards; by 2009, this had risen to 64%.

• Special features: Rewards and benefits often focus on business categories such as shipping, office supplies, travel, and technology.

• Eligibility:

  • Applications typically rely on the owner’s personal credit score, especially for new businesses without a credit history.

  • Income from multiple sources may be considered, improving accessibility for start-ups.

• Credit reporting: Some issuers do not report account activity to the owner’s personal credit file unless the account is delinquent, thereby separating personal and business credit.

Business cards are offered by most major issuers (Visa, MasterCard, American Express, Discover), as well as many local banks and credit unions. Notably, American Express remains the only major issuer of business charge cards in the United States.

10.2 Secured Credit Cards

Secured credit cards are designed for individuals with poor or no credit history.

• Deposit requirement: The cardholder provides a cash deposit—typically 100% to 200% of the desired credit limit.

  • Example: A £1,000 deposit may provide a £500–£1,000 line of credit.

  • Some issuers offer programmes where the required deposit may be as low as 10%.

• Function: Cardholders must make regular repayments like with a standard card. If they default, the issuer can recover funds from the deposit.

• Credit-building tool: Activity is usually reported to major credit bureaus, allowing individuals to establish or rebuild credit history.

• Risk factors:

  • Fees and service charges often exceed those of unsecured cards.

  • Severe delinquency (150–180 days) may result in forfeiture of the deposit and accumulation of additional debt.

  • Deposits are not normally touched for minor delays; they act as security primarily upon account closure or severe default.

Secured cards are thus widely recommended for consumers seeking a pathway back into mainstream credit markets, though often at higher cost.

10.3 Prepaid Cards

Although often marketed as “prepaid credit cards,” these are technically debit products because they involve no extension of credit. Instead, the cardholder spends funds that have been pre-loaded onto the card.

• Branding: Typically issued under Visa, MasterCard, American Express, or Discover brands, allowing them to function like credit cards at merchants worldwide.

• Operation:

  • Funds are deposited in advance by the cardholder (or a third party such as a parent or employer).

  • Purchases reduce the stored balance until it is exhausted.

• Advantages:

  • No need for an established credit history.

  • Can be issued to minors, promoting early financial literacy.

  • Useful for global transactions, especially in regions where international wire transfers are costly and complex.

• Fees:

  • Initial purchase fees, monthly maintenance fees, and transaction fees are common.

  • For this reason, Canada’s Financial Consumer Agency warns that prepaid cards can be an “expensive way to spend your own money.”

• Youth and online use: Prepaid cards are sometimes marketed to teenagers, enabling them to shop online without parental intervention, while limiting risk to the amount loaded.

As of 2018, a large proportion of U.S. debit cards in circulation were in fact prepaid cards (71.7%).

Digital Prepaid Cards

Some prepaid products now exist only in digital form, as cloud-hosted virtual cards usable for online and mobile transactions.

10.4 Charge Cards

Charge cards are often grouped with credit cards but operate differently:

• Repayment: Unlike revolving credit cards, balances must be repaid in full at the end of each billing cycle.

• No preset limit: Many charge cards do not carry a strict credit limit, though issuers monitor spending behaviour and may impose restrictions dynamically.

• Target market: Often marketed to high-income consumers and businesses.

• Examples: American Express is the most well-known global provider of charge cards.

Charge cards provide flexibility and prestige but can be risky for cardholders without disciplined repayment habits, as late payment penalties are severe.

Benefits and Drawbacks of Credit Cards

Credit cards are among the most widely used financial instruments in the world. They offer a range of conveniences, protections, and incentives for cardholders, but they also carry certain risks and drawbacks. Understanding both sides is crucial for responsible usage.

11.1 Benefits to the Cardholder

Convenience and Short-Term Credit

• Credit cards allow cardholders to access small short-term loans instantly, without needing to check their bank balance before every transaction.
• Purchases can be made quickly, provided they remain within the card’s credit limit.
• Unlike cheques or debit cards, there is no immediate outflow of funds from the consumer’s account.

Interest-Free Period

• If the balance is paid in full within the grace period, no interest is charged.
• This allows cardholders to benefit from a form of interest-free borrowing over short cycles.

Legal Protections

• Different countries provide varying levels of consumer protection.
• For example, in the United Kingdom, the issuing bank is jointly liable with the merchant for defective purchases above £100.
• Such measures give consumers confidence when making higher-value transactions.

Product and Purchase Protections

Many cards offer specific protections for purchases, such as:

• Extended warranties beyond the manufacturer’s coverage.
• Price protection, reimbursing the difference if an item drops in price shortly after purchase.
• Purchase protection, covering theft or accidental damage to newly bought items.

Travel and Insurance Benefits

Premium cards often include various insurance features:

• Rental car insurance
• Travel accident insurance
• Baggage delay insurance
• Trip delay or cancellation insurance

These protections can significantly reduce risks and expenses during travel.

Loyalty Programmes and Rewards

Most modern cards include loyalty incentives:

• Cashback rewards: A percentage of spending returned to the cardholder.
• Points systems: Points earned per purchase, redeemable for:
  • Gift cards
  • Products
  • Travel expenses (e.g., airline tickets, hotel stays)
• Transferable points: Some schemes allow conversion of points into airline miles or hotel loyalty programmes.

While such programmes benefit consumers, some research suggests they may indirectly raise merchant costs and retail prices, as providers pass the expense of rewards back to businesses and, ultimately, to consumers.

11.2 Distinction from Other Payment Cards

Credit vs Charge Cards

• Credit cards allow balances to roll over month-to-month, subject to interest.
• Charge cards require the full balance to be repaid at the end of each statement cycle.
• With charge cards, no external lender is reimbursed; they simply defer payment between buyer and seller. In contrast, credit cards involve a third-party issuer who pays the merchant upfront and is later reimbursed by the cardholder.

Credit vs Debit Cards

• Debit cards draw directly on the cardholder’s bank account balance.
• Credit cards allow borrowing against a credit line, creating a revolving debt structure.

11.3 Global Prevalence

Credit cards are deeply embedded in modern financial life:

• In 2018, there were 1.12 billion credit cards in circulation in the U.S.
• Approximately 72% of American adults held at least one card.

This widespread adoption highlights the utility and perceived benefits of credit cards, though it also points to the importance of responsible management.

Credit Card Benefits and Drawbacks

Credit cards offer a wide range of benefits, but they also carry substantial risks and social costs. While many consumers enjoy the convenience, protections, and rewards programmes that come with cards, others fall into debt traps, and merchants (and society at large) bear indirect costs.

12.1 Benefits in the United States

The specific benefits of consumer credit cards vary by issuer and network (e.g., Visa, MasterCard, American Express, Discover). In the U.S., credit cards often include:

• Extended warranties
• Purchase protection and insurance cover
• Travel accident insurance
• Loyalty and rewards programmes (cashback, points, or airline miles)

However, the extent of these benefits differs significantly between cards and networks.

12.2 Detriments to Cardholders

High Interest Rates and Bankruptcy

• Introductory offers: Many cards advertise low interest rates for the first 6 to 12 months, after which standard APRs—often 20–30%—apply.
• Missed payments: Penalty interest rates are imposed if payments are late. Some issuers also apply universal default, meaning a late payment on an unrelated account can trigger higher rates across all accounts with the same provider.
• Snowball effect: Unexpectedly high rates can quickly overwhelm cardholders, leading to mounting debt and, in severe cases, bankruptcy.
• Issuer discretion: Most cardholder agreements allow issuers to raise rates unilaterally, with minimal justification.

Example: First Premier Bank once offered a card with a staggering 79.9% APR, later discontinued in 2011 due to widespread defaults.

Research indicates that around 40% of consumers select suboptimal credit card products, often incurring hundreds of dollars in avoidable interest costs.

Weakening of Self-Regulation

Studies consistently show that consumers:

• Spend more when paying with a credit card compared to cash.
• Experience less of the “pain of payment” due to the abstract nature of credit.
• Are more likely to engage in impulse spending and, in some cases, consume more unhealthy food when using credit instead of cash.

Thus, credit card usage can encourage overconsumption and weaken self-control.

12.3 Detriments to Society

Inflated Pricing for All Consumers

• Merchants must pay interchange fees and discount fees (a percentage of each transaction) for accepting cards.
• In many jurisdictions, merchants were historically prohibited from passing these fees directly to credit card users or from imposing a minimum purchase requirement (though these restrictions have now been lifted in the S., U.K., and Australia).
• As a result, merchants raise overall prices to cover fees, meaning that all customers pay more, even those who use cash.

The Scale of Fees

• In the S. in 2008, credit card companies collected $48 billion in interchange fees.
• This translated to an average of $427 per family or roughly 2% per transaction.

Rewards and Redistribution

• Rewards programmes transfer wealth from non-card users to cardholders.
• On average, cash payers subsidise card payers by $1,282 per year, as merchants increase prices to cover rewards costs borne by networks and issuers.

Benefits and Costs to Merchants

Credit cards bring both advantages and challenges for merchants. While they improve sales security and broaden customer payment options, they also impose significant fees, compliance obligations, and risks that must be managed.

13.1 Benefits to Merchants

Credit cards provide merchants with a range of benefits:

• Security of Payment:
  • Credit card transactions are generally safer than cheques because the issuing bank commits to paying the merchant once the transaction is authorised.
  • This holds true even if the cardholder later defaults, except in cases of legitimate disputes that may result in a chargeback.
• Reduced Theft Risk:
  • Cards are safer than cash, helping to prevent employee theft and reducing the need to store and transport large amounts of money.
• Lower Back-Office Costs:
  • By reducing cheque processing and cash-handling, credit cards streamline administrative work.
• Delegation of Credit Risk:
  • In the past, merchants had to evaluate each customer’s creditworthiness individually. With credit cards, the bank assumes this responsibility, making sales easier and quicker.
• Sales Stimulation:
  • Customers can purchase goods and services immediately without being constrained by their cash holdings or current account balances.
  • This immediacy often increases turnover and underpins much of merchants’ marketing strategies.
• Secured Transactions:
  • Banks charge merchants a commission (known as a discount fee) for processing each transaction. Although this involves costs, the guarantee of payment adds value.

13.2 Costs to Merchants

Despite the benefits, merchants face substantial costs when accepting credit cards:

• Transaction Fees:
  • Typically, merchants are charged 1% to 4% of each credit card transaction’s value.
  • Additional variable charges, known as the merchant discount rate, may also apply.
• Profit Margin Reduction:
  • For low-value transactions, card fees can erode or even eliminate profit.
  • Similarly, merchants with high-value transactions may find the percentage-based fees disproportionately expensive.
• Surcharges:
  • Some merchants add a “credit card supplement” or surcharge to offset fees, either as a flat rate or a percentage.
  • In the United States, this practice was prohibited under most credit card contracts until 2013, when a landmark settlement allowed merchants to levy surcharges.
  • However, most retailers avoid doing so for fear of losing customers.
• Legal Battles:
  • U.S. merchants have fought high fees in court, arguing that MasterCard and Visa used monopoly power to impose excessive charges.
  • A 2013 federal ruling approved a $5.7 billion antitrust settlement, the largest of its kind, offering payouts to merchants.
  • Some large retailers, including Wal-Mart and Amazon, opted out of the settlement and continue to pursue separate legal action.
• Equipment and Compliance Costs:
  • Merchants must lease or purchase payment terminals and maintain compliance with complex data security standards (such as PCI DSS).
  • These requirements can be particularly burdensome for smaller businesses with limited resources.
• Delayed Settlement:
  • Funds from card transactions may take several days to be deposited into merchants’ bank accounts, creating cash-flow challenges.
• Chargeback Risk:
  • Merchants bear the risk of chargebacks, where a transaction is reversed due to disputes initiated by the cardholder.

Security

Credit card security is a central concern for both consumers and merchants. It rests on two key pillars: the physical security of the card itself and the confidentiality of the card number and related data. Any compromise in either area can expose cardholders to fraud.

14.1 Physical and Data Security

• Physical risks:
  Whenever anyone other than the rightful cardholder has access to the card or its number, the potential for misuse arises. Lost or stolen cards, if not quickly cancelled, can be used fraudulently.
• Verification practices:
  • Historically, merchants often accepted credit card numbers for mail order purchases without additional verification. Today, most merchants only ship to confirmed addresses to reduce fraud.
  • For in-store purchases, many merchants now require the physical card to be present along with a signature (for magnetic stripe cards) or a PIN code (in Europe).
• PCI DSS compliance:
  The Payment Card Industry Data Security Standard (PCI DSS), issued by the PCI Security Standards Council (PCI SSC), mandates that merchants and acquiring banks implement robust security protocols for handling cardholder data.

14.2 Fraud Management Philosophy

Credit card companies aim not to eliminate fraud entirely but to reduce it to manageable levels. This commercial approach means that fraud prevention measures are usually implemented only if their cost is justified by the expected reduction in fraud losses.

• Friendly fraud: Occurs when customers illegitimately dispute transactions, claiming them as unauthorised chargebacks.
• Data breaches: Poor practices by merchants (e.g., emailing unencrypted card details, insecure data storage, or rogue employees) are among the most common causes of fraud.
• Internet fraud: Stolen credit card details are often exploited in online purchases where physical presentation of the card is not required.

14.3 Controlled Payment Numbers

One effective tool against online and telephone fraud is the use of controlled payment numbers (also known as virtual credit cards or disposable cards).

• These are single-use numbers linked to the user’s real account but shield the actual card details.
• They are valid for limited amounts, a set time frame, or for a single merchant.
• If compromised, they cannot be reused.

14.4 Advanced Card Controls

Technology has enabled a range of customisable controls for cardholders:

• Geographical limits – restricting use to a country or region.
• Transaction-type controls – e.g., allowing use in shops but not online.
• Temporal restrictions – limiting use to certain times or dates.
• Alerts and monitoring – real-time notifications when attempted fraudulent use occurs.

For example, a card could be secured for Chip and PIN transactions within the home country but blocked abroad, preventing thieves from using stolen details in non-EMV nations. Similarly, online transactions can be disabled unless activated by the cardholder.

14.5 Security Features on Cards

Modern credit cards include physical anti-counterfeiting measures:

• Watermarks that fluoresce under ultraviolet light.
• Holograms (e.g., Visa’s “V” or MasterCard’s “MC”).
• Older Visa cards featured an eagle or dove visible only under ultraviolet light.

These features provide an additional layer of visual authentication for merchants.

14.6 Enforcement and Prosecution

In the United States, enforcement against credit card fraud falls to multiple agencies:

• Department of Justice (DOJ)
• United States Secret Service
• Federal Bureau of Investigation (FBI)
• Immigration and Customs Enforcement (ICE)
• U.S. Postal Inspection Service

However, due to limited resources, they generally only prosecute cases involving losses over $5,000.

14.7 Recent and Emerging Security Measures

1. Tamper-resistant smart cards (IC-based cards) compliant with the EMV (Europay–MasterCard–Visa) standard have been introduced to reduce counterfeiting.
2. CSC/CVV codes: Three- or four-digit codes now appear on most cards, particularly for card-not-present transactions (online and telephone).
3. Global standards: Organisations such as PCI DSS and the Secure POS Vendor Alliance continue to work towards integrating current and emerging technologies into consistent global frameworks.

Code 10 and the Costs and Revenues of Credit Card Issuers

15.1 Code 10

A Code 10 call is initiated when a merchant suspects that a credit card transaction may be fraudulent.

• The merchant calls the operator, who asks a series of Yes/No questions to assess the level of suspicion.
• If it is safe, the merchant may be instructed to retain the card.
• In certain cases, the merchant may even receive a reward from the issuing bank for returning a confiscated card, particularly if the action contributes to an arrest.

Code 10 procedures form part of frontline fraud detection in merchant environments.

15.2 Costs and Revenues of Credit Card Issuers

Issuing banks face significant operating costs in managing their card portfolios, offset by revenues from fees, interest, and interchange charges.

15.2.1 Costs

(a) Charge-offs

A charge-off occurs when a cardholder becomes severely delinquent, typically after six months of non-payment.

• At this point, the creditor declares the debt uncollectible and reports it to credit bureaus. For example, Equifax uses the code “R9” to denote a charge-off.
• Although marked as written off, the debt remains legally valid. Creditors may still attempt recovery for three to seven years, depending on state law.
• Recovery methods include:
  • Internal collections staff.
  • Outsourced collection agencies.
  • Legal actions such as lawsuits or arbitration (commonly pursued for debts exceeding £1,200–£1,600).

Charge-offs are considered a cost of doing business, reflecting both bad debt and fraud losses absorbed by issuers.

(b) Fraud

Fraud constitutes another significant cost area for issuers:

• In relative terms, fraud losses are small but non-negligible. In 2006, global fraud losses were calculated at 7 cents per $100 of transactions (7 basis points).
• In the U.K., losses exceeded £500 million in 2004.

Key practices and impacts:

• When cards are stolen or cloned, issuers typically refund fraudulent charges, often at the expense of merchants in mail-order or “card-not-present” transactions.
• In many jurisdictions, merchants bear liability if they failed to request identification.
• Despite the introduction of EMV chip technology, credit card fraud remains a persistent issue.

Fraud monitoring and investigation:

• Most financial institutions operate specialised fraud departments within Risk Management, Authorisation, or Card Services.
• Teams focus on minimising losses, investigating incidents, and tracking down offenders.

Fraudulent transactions represent one of the largest operational risks of card issuance, reinforcing the importance of technological and procedural safeguards.

Interest Expenses, Operating Costs, and Rewards of Credit Card Issuers

16.1 Interest Expenses

Banks and card issuers typically borrow the funds that they then lend to their customers.

• Because they can access low-interest loans from other financial institutions, issuers are able to meet customer borrowing needs while simultaneously lending their own capital to other borrowers at higher rates.
• For example, if the card issuer charges 15% interest on balances carried by customers, but its own cost of borrowing is 5%, and the balance remains outstanding for one year, the issuer earns a 10% net interest spread.
• In this case, the 5% represents the interest expense, while the spread reflects the profit margin on lending.

The net interest spread forms one of the most important sources of revenue for credit card issuers.

16.2 Operating Costs

Operating costs represent the total expenses involved in managing and maintaining a credit card portfolio. These costs include:

• Personnel expenses: salaries and benefits for executives, managers, and customer service staff.
• Card production and distribution: printing and issuing the plastic cards, and mailing statements to cardholders.
• Technology and infrastructure: running computer systems that track balances, transactions, and authorisations.
• Customer support: handling cardholder queries, disputes, and complaints via call centres and online platforms.
• Fraud protection: investments in fraud detection systems and security measures to safeguard customers.
• Marketing and promotions: significant expenditure on advertising, sign-up bonuses, and customer acquisition campaigns.

For some issuers, marketing and rewards-related programmes account for a particularly large portion of operating expenses.

16.3 Rewards

To encourage card usage, many issuers provide rewards schemes. These often include:

• Frequent flyer miles or airline points.
• Gift certificates or vouchers.
• Cashback on purchases.

Key points about rewards systems:

• Rewards are tied to spending, usually on goods and services. Some issuers extend eligibility to balance transfers or cash advances.
• Rewards typically cost the issuer between 0.25% and 2.0% of the net spread.
• Payment networks such as Visa and MasterCard have increased their fees in order to support the funding of such schemes.
• Some issuers discourage redemption by requiring the cardholder to contact customer service, while redemption features online may be deliberately obscured to reduce costs.

Financial impact of rewards:

• In a highly competitive market, rewards programmes can significantly reduce profitability if not carefully managed.
• Unlike unused gift cards (where, in some U.S. states, unredeemed balances escheat to the state treasury), unredeemed credit card reward points remain with the issuer, providing a modest offset against programme costs.

Revenues of Credit Card Issuers

18.1 Interchange Fees

In addition to the fees charged directly to cardholders, merchants must also pay interchange fees to the card-issuing bank and the card association.

• For many issuers, interchange revenues may represent around one quarter of total revenues.
• These fees usually range from 1% to 6% of each sale, though the precise percentage varies according to several factors:
  • Merchant size: large merchants are often able to negotiate lower rates.
  • Type of card: rewards cards and business cards generally cost merchants more to process.
  • Type of merchant and its industry sector.
  • Merchant’s sales volume and average transaction size.
  • Card presence: whether the card was physically swiped, tapped, or inserted, or used remotely.
  • Method of information capture: e.g., chip and PIN, magnetic stripe, or online entry.
  • Settlement timing: when the transaction was processed and settled.
  • Authorised vs. settled amount: differences between the initial hold and final payment.

In some cases, merchants attempt to offset these costs by imposing a surcharge for credit card payments, thereby encouraging customers to use cash, debit cards, or cheques instead.

18.2 Interest on Outstanding Balances

Interest on balances is one of the largest revenue streams for issuers, though the rates vary widely:

• Promotional or “teaser” APRs may start as low as 0% for an introductory period (e.g., six months).
• Once the promotional period ends, standard rates may climb to 20%–40% depending on the card type and issuer.
• In the United States, there is no federal cap on credit card interest rates or late fees.
  • Regulation is determined by state law, and some states such as South Dakota and Delaware have extremely lenient or non-existent usury limits.
  • As a result, many credit card operations are headquartered in these states.

If the cardholder fails to pay on time, the teaser rate may be replaced by a much higher penalty interest rate (e.g., 23.99%), which can apply retroactively to existing balances.

18.3 Fees Charged to Customers

Apart from interchange and interest, card issuers earn substantial revenue from customer fees. Common examples include:

• Membership fees – annual or monthly, sometimes calculated as a percentage of the credit limit.
• Cash advance and convenience cheque fees – typically around 3% of the amount borrowed.
• Over-limit fees – charged when the credit limit is exceeded, intentionally or accidentally.
• Exchange rate loading fees – applied to foreign transactions; sometimes not itemised on statements.
  • Variations between issuers can be extreme; for example, a 2009 Lonely Planet report found differences of up to 10%.
• Late payment fees – applied if at least the minimum payment is not received by the due date.
• Returned cheque or failed payment fees – often including charges for payments made by phone.
• Foreign transaction fees – typically up to 3% of the purchase amount, though a few issuers waive this.
• Finance charges – any fees included in the overall cost of borrowing.

Regulatory Safeguards

In the United States, the Credit CARD Act of 2009 introduced protections requiring issuers to provide 45 days’ written notice before increasing or altering certain charges. This rule applies to:

• Annual fees
• Cash advance fees
• Late payment fees

Controversy Surrounding Credit Cards

19.1 Trailing Interest

One of the most contentious issues in the credit card industry is that of trailing interest.

• Definition: Trailing interest refers to interest that accrues on a balance after the monthly statement has been produced but before the cardholder repays the balance.
• Impact: The additional interest is typically not visible on the current statement but instead appears on the following month’s bill, leaving many consumers surprised.

In the United States, Senator Carl Levin highlighted this issue, raising concerns about the millions of Americans burdened by hidden fees, compounding interest, and unclear contractual terms.

• The problem was formally examined in hearings of the Senate Permanent Subcommittee on Investigations, chaired by Senator Levin.
• Levin argued for greater transparency and fairness in the credit card industry and suggested that legislative reform was necessary.
• His concerns contributed to the passage of the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, which addressed many of these exploitative practices and expanded consumer protections.

19.2 Hidden Costs

United Kingdom

In the United Kingdom, merchants won the right under The Credit Cards (Price Discrimination) Order 1990 to charge different prices depending on the payment method. For example, customers might pay a higher price if using a credit card instead of cash.

• This practice was later abolished under the European Union’s Second Payment Services Directive (PSD2), which prohibited surcharges for credit card payments across the EU.
• By 2007, the U.K. had become one of the most credit card-intensive markets in the world, with an average of 2.4 credit cards per consumer, according to figures from the U.K. Payments Administration Ltd.

United States

In the United States, federal law prohibited surcharges on credit card transactions until 1984, under provisions of the Truth in Lending Act. Once this federal restriction expired, individual states adopted their own legislation:

• States such as California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Maine, New York, Oklahoma, and Texas have laws prohibiting merchants from imposing surcharges on card payments.

By the mid-2000s, the U.S. had one of the highest ratios of credit cards per capita worldwide:

• In 2006, there were approximately 984 million bank-issued Visa and MasterCard credit and debit accounts for an adult population of around 220 million people.
• The per capita ratio stood at nearly 4:1 in 2003 and climbed as high as 5:1 by 2006, demonstrating the extraordinary penetration of credit cards in the American economy.

Over-limit Charges and Consumer Resources

20.1 Over-limit Charges in the United Kingdom

For most consumers in the United Kingdom, interest remains the primary expense incurred from using credit cards, provided they:

• Stay within their credit limit, and
• Make at least the minimum monthly repayment on time.

However, those who are less careful—regularly exceeding their credit limit or making late payments—were historically exposed to multiple penalty charges.

• In 2006, the Office of Fair Trading (OFT) ruled that charges above £12 would be presumed unfair, prompting the majority of card providers to reduce their fees to this level.
• Previously, higher fees had been justified by card operators as necessary to recover their overall business costs, rather than the actual cost of a limit breach, which was estimated at between £3 and £4.

Under U.K. common law, profiting from a customer’s mistake could constitute an unlawful penalty for breach of contract. It might also contravene the Unfair Terms in Consumer Contracts Regulations 1999.

Subsequent rulings on personal current accounts weakened the penalty argument, making it unlikely that further test cases would succeed. Nonetheless:

• Consumers have successfully claimed refunds for charges above £12, often including interest they would have earned had the money not been deducted.
• Claims at the £12 threshold remain contentious and less certain to succeed.

20.2 Over-limit Charges in the United States

In the United States, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 fundamentally changed the rules surrounding over-limit fees:

• Consumers must now opt in to over-limit charges.
• Some issuers actively solicit opt-ins, framing it as a benefit since it reduces the risk of declined transactions.
• Others have simply abandoned the practice of levying over-limit fees altogether.

Even with opt-in provisions, banks retain discretion over whether to authorise transactions beyond a customer’s credit limit. An over-limit fee will only apply if:

1. The consumer has opted in, and
2. The bank chooses to approve the excess transaction.

This legislation took effect on 22 February 2010. In addition, card companies are now required to clearly display on customer statements how long it would take to repay the outstanding balance in full if only minimum payments are made.

20.3 Neutral Consumer Resources in Canada

The Government of Canada provides comprehensive, impartial resources for credit card users:

• The Financial Consumer Agency of Canada (FCAC) maintains a database of nearly 200 credit cards available in Canada.
• Updated quarterly with data supplied by credit card issuers, it includes details on:
  • Fees,
  • Interest rates,
  • Features, and
  • Rewards programmes.

This information is made accessible in two main formats:

1. PDF Comparison Tables
   • Cards are grouped by type (e.g., student cards, business cards), enabling straightforward comparisons of features.
2. Interactive Tool on the FCAC website
   • Users answer interview-style questions about their spending and repayment habits.
   • Unsuitable cards are filtered out, leaving a tailored shortlist of options.
   • Detailed comparisons can then be made on reward schemes, interest rates, and other features.

This approach ensures Canadian consumers have access to neutral, transparent information that helps them make informed decisions about credit cards.

Credit Cards in ATMs, Acceptance Marks, and Entrepreneurial Use

21.1 Credit Cards in ATMs

Many credit cards can be used in automated teller machines (ATMs) to withdraw cash against the credit limit extended to the cardholder. However, unlike purchases, these withdrawals—known as cash advances—carry specific conditions that often make them more costly for consumers:

• Immediate Interest Accrual: Interest on cash advances is typically charged from the date of withdrawal, rather than from the monthly billing date.
• Higher Interest Rates: Cash advance interest rates are usually higher than purchase rates, meaning balances can become expensive quickly.
• Additional Commission Fees: Most issuers levy a commission for cash withdrawals, even if the ATM is operated by the same bank as the card issuer.

Merchants generally do not provide cashback services for credit card transactions. This is because they would incur commission charges from their acquiring bank or merchant services provider, making the practice uneconomical.

• Exception – Discover Card: Holders of Discover cards may receive up to $120 cashback at participating merchants. The cashback amount is added to the purchase total and does not attract additional fees, as the transaction is processed as a purchase rather than a cash advance.

Another issue faced by consumers is payment allocation. When payments are applied at the end of a billing cycle, issuers typically apply them to purchases before cash advances. This means cardholders may continue to carry large, high-interest cash balances, even if they pay off the statement balance each month.

21.2 Acceptance Marks

An acceptance mark is a logo or symbol displayed at merchant locations, ATMs, or in advertisements to indicate which card schemes (Visa, Mastercard, American Express, etc.) are accepted. These marks serve an important purpose:

• They provide clarity to customers on where their cards can be used.
• They differ from specific card product names (e.g., American Express Centurion, Eurocard) and instead represent the broader card network.

It is important to note, however, that:

• An acceptance mark is not a guarantee that every card within that scheme will be accepted.
• Restrictions may apply to cards issued in foreign countries, often due to contractual agreements or local legal limitations.

21.3 Credit Cards as Funding for Entrepreneurs

Credit cards have historically been used as a last-resort financing tool by entrepreneurs when more conventional funding sources, such as bank loans or venture capital, were unavailable. While highly risky due to high interest rates and potential debt accumulation, they have played a role in the early success stories of several well-known individuals and businesses:

• Len Bosack and Sandy Lerner used personal credit cards to launch Cisco Systems.
• Larry Page and Sergey Brin, co-founders of Google, financed their start-up by using credit cards to purchase essential equipment, including a terabyte of hard disks.
• Filmmaker Robert Townsend financed part of Hollywood Shuffle through credit card debt.
• Director Kevin Smith funded his cult classic Clerks by maxing out multiple credit cards.
• Actor Richard Hatch partly financed Battlestar Galactica: The Second Coming with credit cards.
• Hedge fund manager Bruce Kovner, who went on to establish Caxton Associates, began his financial markets career using borrowed funds from his credit card.
• In the United Kingdom, entrepreneur James Caan (famed for his role on Dragons’ Den) financed his first business using several credit cards.

While these stories highlight the role of credit cards in fuelling entrepreneurial ventures, they also serve as cautionary tales. For most entrepreneurs, reliance on credit cards for business capital poses significant financial risks and should be approached with caution.