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ENROLMENT NO: O6621303915

A credit card is a payment card issued to users (cardholders) as a method of
payment. It allows the cardholder to pay for goods and services based on the
holder's promise to pay for them. The issuer of the card (usually a bank) creates a
revolving account and grants a line of credit to the cardholder, from which the
cardholder can borrow money for payment to a merchant or as a cash advance.
A credit card is different from a charge card: a charge card requires the balance to
be repaid in full each month. In contrast, credit cards allow the consumers a
continuing balance of debt, subject to interest being charged. A credit card also
differs from a cash card, which can be used like currency by the owner of the card.
A credit card differs from a charge card also in that a credit card typically involves
a third-party entity that pays the seller and is reimbursed by the buyer, whereas a
charge card simply defers payment by the buyer until a later date.
The size of most credit cards is 3 38 in 2 18 in (85.7 mm 54.0 mm),
conforming to the ISO/IEC 7810 ID-1 standard. Credit cards have a printed or
embossed bank card number complying with the ISO/IEC 7812 numbering
standard. Both of these standards are maintained and further developed by
ISO/IEC JTC 1/SC 17/WG 1. Before magnetic stripe readers came into widespread
use, plastic credit cards issued by many department stores were produced on stock

("Princess" or "CR-50") slightly longer and narrower than 7810. Many modern
credit cards have a computer chip embedded in them for security reasons.

Edward Bellamy's Looking Backward
The concept 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 in this novel, although this referred to a card for spending a
citizen's dividend from the government, rather than borrowing.
Charge coins, medals, and so on
Charge coins and other similar items were used in the late 1800s to the 1930s.
They came in various shapes and sizes; with materials made out of celluloid (an
early type of plastic), copper, aluminum, steel, and other type of whitish metals.
Each charge coin usually had a little hole, enabling it to be put in a key ring like a
key. These charge coins were usually given to customers who had charge accounts
in department stores, hotels, and so on. A charge coin usually had the charge
account number along with the merchant's name and logo.
The charge coin offered a simple and fast way to copy a charge account number to
the sales slip, by imprinting the coin onto the sales slip. This sped the process of
copying, previously done by handwriting. It also reduced the number of errors, by

having a standardized form of numbers on the sales slip, instead of various kind of
handwriting style.
Because the customer's name was not on the charge coin, almost anyone could use
it. This sometimes led to a case of mistaken identity, either accidentally or
intentionally, by acting on behalf of the charge account owner or out of malice to
defraud both the charge account owner and the merchant. Beginning in the 1930s,
merchants started to move from charge coins to the newer Charga-Plate.
Early charge card
Western Union, oil companies, and other companies
Western Union began issuing charge cards to its frequent customers in 1921.
[Citation needed] In 1938, several companies started to accept each other's cards.
In the 1940s, oil companies in the United States used them to sell fuel and other oil
based products to a growing number of automobile owners. [Citation needed]
The Charga-Plate, developed in 1928, was an early predecessor to the credit
card and used in the U.S. from the 1930s to the late 1950s. It was a 2 in
1 in rectangle of sheet metal related to Addressograph and military dog tag
systems. It was embossed with the customer's name, city, and state. It held a
small paper card on its back for a signature. In recording a purchase, the

plate was laid into a recess in the imprinter, with a paper "charge slip"
positioned on top of it. The record of the transaction included an impression
of the embossed information, made by the imprinter pressing an inked
ribbon against the charge slip. Charga-Plate was a trademark of Farrington
Manufacturing Co. Charga-Plates were issued by large-scale merchants to
their regular customers, much like department store credit cards of today. In
some cases, the plates were kept in the issuing store rather than held by
customers. When an authorized user made a purchase, a clerk retrieved the
plate from the store's files and then processed the purchase. Charga-Plates
speeded back-office bookkeeping and reduced copying errors that were done
manually in paper ledgers in each store.
Air Travel Card
In 1934, American Airlines and the Air Transport Association simplified the
process even more with the advent of the Air Travel Card. They created a
numbering scheme that identified the issuer of the card as well as the
customer account. This is the reason the modern UATP cards still start with
the number 1. With an Air Travel Card, passengers could "buy now, and pay
later" for a ticket against their credit and receive a fifteen percent discount at
any of the accepting airlines. By the 1940s, all of the major domestic airlines
offered Air Travel Cards that could be used on 17 different airlines. By 1941
about half of the airlines' revenues came through the Air Travel Card

agreement. The airlines had also started offering installment plans to lure
new travelers into the air. In October 1948, the Air Travel Card became the
first internationally valid charge card within all members of the International
Air Transport Association.
Early general purpose charge cards: Diners Club, Carte Blanche, and
American Express
The concept of customers paying different merchants using the same card was
expanded in 1950 by Ralph Schneider and Frank McNamara, founders of Diners
Club, 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 and required the entire bill to be paid with each statement. That was followed
by Carte Blanche and in 1958 by American Express which created a worldwide
credit card network (although these were initially charge cards that later acquired
credit card features).
Bank Americard and Master Charge
Until 1958, no one had been able to successfully establish a revolving credit
financial system in which a card issued by a third-party bank was being generally
accepted by a large number of merchants, as opposed to merchant-issued revolving
cards accepted by only a few merchants. There had been a dozen attempts by small

American banks, but none of them were able to last very long. In September 1958,
Bank of America launched the Bank Americard in Fresno, California, which would
become the first successful recognizably modern credit card. It was eventually
licensed to other banks around the United States and then around the world, and in
1976, all Bank Americard licensees united themselves under the common brand
Visa. In 1966, the ancestor of MasterCard was born when a group of banks
established Master Charge to compete with Bank Americard; it received a
significant boost when Citibank merged its own Everything Card, launched in
1967, into Master Charge in 1969.
Early credit cards in the U.S., of which Bank Americard was the most prominent
example, were mass-produced and mass mailed unsolicited to bank customers who
were thought to be good credit risks. But, "They have been mailed off to
unemployables, drunks, narcotics addicts and to compulsive debtors, a process
President Johnson's Special Assistant Betty Furness found very like 'giving sugar
to diabetics'." These mass mailings were known as "drops" in banking terminology,
and were outlawed in 1970 due to the financial chaos they caused. However, by the
time the law came into effect, approximately 100 million credit cards had been
dropped into the U.S. population. After 1970, only credit card applications could
be sent unsolicited in mass mailings.

Development outside North America

The fractured nature of the U.S. banking system under the GlassSteagall Act
meant that credit cards became an effective way for those who were traveling
around the country to move their credit to places where they could not directly use
their banking facilities. 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 1966, Barclaycard in the United Kingdom launched the first credit card outside
the United States.
Although credit cards reached very high adoption levels in the US, Canada and the
UK in the mid 20th century, many cultures were more cash-oriented, or developed
alternative forms of cashless payments, such as Carte bleue or the Eurocard
(Germany, France, Switzerland, and others). In these places, adoption of credit
cards was initially much slower. Because of strict regulations regarding bank
overdrafts, some countries, France in particular, were much faster to develop and
adopt chip-based credit cards which are seen as major anti-fraud credit devices.
Debit cards and online banking (using either ATMs or PCs [clarification needed])
are used more widely than credit cards in some countries. It took until the 1990s to

reach anything like the percentage market penetration levels achieved in the US,
Canada, and UK. In some countries, acceptance still remains low as the use of a
credit card system depends on the banking system of each country; while in others,
a country sometimes had to develop its own credit card network, e.g. UK's
Barclaycard and Australia's Bankcard. Japan remains a very cash-oriented society,
with credit card adoption being limited mainly to the largest of merchants;
although stored value cards (such as telephone cards) are used as alternative
currencies, the trend is toward RFID-based systems inside cards, cellphones, and
other objects.
Vintage, old, and unique credit cards as collectibles
The design of the credit card itself has become a major selling point in recent
years.[citation needed] The value of the card to the issuer is often related to the
customer's usage of the card, or to the customer's financial worth. This has led to
the rise of Co-Brand and Affinity cards, where the card design is related to the
"affinity" (a university or professional society, for example) leading to higher card
usage. In most cases a percentage of the value of the card is returned to the affinity
A 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 plastic, then metal and fiber, then paper, and
are now mostly polyvinyl chloride (PVC) plastic.

Transaction steps
Authorization: The cardholder presents the card as payment to the merchant and
the merchant submits the transaction to the acquirer (acquiring bank). The acquirer
verifies the credit card number, the transaction type and the amount with the issuer
(card-issuing bank) and reserves that amount of the cardholder's credit limit for the
merchant. An authorization will generate an approval code, which the merchant
stores with the transaction.
Batching: Authorized transactions are stored in "batches", which are sent to the
acquirer. Batches are typically submitted once per day at the end of the business
day. If a transaction is not submitted in the batch, the authorization will stay valid
for a period determined by the issuer, after which the held amount will be returned
to the cardholder's available credit (see authorization hold). Some transactions may
be submitted in the batch without prior authorizations; these are either transactions
falling under the merchant's floor limit or ones where the authorization was
unsuccessful but the merchant still attempts to force the transaction through. (Such

may be the case when the cardholder is not present but owes the merchant
additional money, such as extending a hotel stay or car rental.)
Clearing and Settlement: The acquirer sends the batch transactions through the
credit card association, which debits the issuers for payment and credits the
acquirer. Essentially, the issuer pays the acquirer for the transaction.
Funding: Once the acquirer has been paid, the acquirer pays the merchant. The
merchant receives the amount totaling the funds in the batch minus either the
"discount rate", "mid-qualified rate", or "non-qualified rate" which are tiers of fees
the merchant pays the acquirer for processing the transactions.
Chargebacks: A chargeback is an event in which money in a merchant account is
held due to a dispute relating to the transaction. Chargebacks are typically initiated
by the cardholder. In the event of a chargeback, 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. `

1) Business credit cards
Business credit cards are specialized credit cards issued in the name of a registered
business, and typically they can only be used for business purposes. Their use has
grown in recent decades. In 1998, for instance, 37% of small businesses reported
using a business credit card; by 2009, this number had grown to 64%.

Business credit cards offer a number of features specific to businesses. They

frequently offer special rewards in areas such as shipping, office supplies, travel,
and business technology. They can be harder to apply for than personal cards,
however, and often carry high credit score requirements.
They can also restrict where and when a credit card can be used
2. 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 $1,000, they
will be given credit in the range of $5001,000. 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 because they have noticed that delinquencies
were notably reduced when the customer perceives something to lose if the balance
is not repaid.
The cardholder of a secured credit card is still expected to make regular payments,
as with a regular credit card, but should they 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 building a 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. Fees and service charges for
secured credit cards often exceed those charged for ordinary non-secured credit
cards. 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 are almost always more expensive than unsecured credit cards.
Sometimes a credit card will be secured by the equity in the borrower's home.
3. Prepaid cards
A "prepaid credit card" is not a true credit card, since no credit is offered by the
card issuer: the cardholder spends money which has been "stored" via a prior
deposit by the cardholder or someone else, such as a parent or employer. However,
it carries a credit-card brand (such as Discover, Visa, MasterCard, American
Express, or JCB) and can be used in similar ways just as though it were a credit
card. Unlike debit cards, prepaid credit cards generally do not require a PIN. An
exception are prepaid credit cards with an EMV chip. These cards do require a PIN
if the payment is processed via Chip and PIN technology.
After purchasing the card, the cardholder loads the account with any amount of
money, up to the predetermined card limit and then uses the card to make
purchases the same way as a typical credit card. Prepaid cards can be issued to
minors (above 13) since there is no credit line involved. The main advantage over
secured credit cards is that the cardholder is not required to come up with $500 or
more to open an account. With prepaid credit cards purchasers are not charged any

interest but are often charged a purchasing fee plus monthly fees after an arbitrary
time period. Many other fees also usually apply to a prepaid card.
Prepaid credit cards are sometimes marketed to teenagers for shopping online
without having their parents complete the transaction. Teenagers can only use
funds that are available on the card which helps promote financial management to
reduce the risk of debt problems later in life.
Prepaid cards can be used globally. The prepaid card is convenient for payees in
developing countries like Brazil, Russia, India, and China, where international wire
transfers and bank checks are time consuming, complicated and costly. [Citation
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 entitled
Pre-paid Cards which explains the advantages and disadvantages of this type of
prepaid card.
4. Digital cards
A digital card is a digital cloud-hosted virtual representation of any kind of
identification card or payment card, such as a credit card.

Advantages of Credit Cards to Banks

Banks are in the business of making money; offering credit cards to their
customers creates another stream of income for a lending institution. The credit
card industry is huge, with profits earned in excess of $19 billion in the year 2008
alone. There are a number of advantages of credit cards to banks. Due to their
simplicity and convenience to consumers, it looks as if banks will not be getting rid
of such cards at any point in the near future.
Store Fees
When you use your credit card to purchase an item, you may not be aware that
the owner of the store you buy from is receiving less than the sale amount from
her bank. Each time you use your card at a store, the bank subtracts a small
percentage of the price and takes this amount as a fee.
Interest Fees
Banks also make money from the interest fees that they charge on a monthly
basis on your unpaid balance. The average interest rate is over 16 percent for









to Card holders who own business credit cards enjoy a

slightly lower rate of interest, at a bit over 15 percent.

Late Payment Fees

Credit card holders who do not pay their bill in a timely manner are often
responsible for a late payment penalty. In addition to charging people who pay
late, certain banks will also change the terms of your credit card interest rate.
Altering this rate will result in paying a higher monthly payment to the banks.
These fees can be minimized by setting up your credit card bills to be paid
automatically directly from your checking account. The good news is that due
to a federal law which went into effect in February of 2010, banks must notify
card holders of any interest rate changes 45 days in advance, and your interest
rate can't be changed during your first year with the credit card company.
High Annual Fees
More banks now charge credit card consumers annual fees. These fees
generally start at $29 and are another method to earn money from credit card
holders. Be aware that now, certain banks may also charge you for not using
your card for a certain period of time, or for charging less than a certain
amount. Contact your bank to find out whether these terms apply to your credit

Disadvantages of Credit Cards to Banks

Banks face some problems in recovery of the money which the customers spend
excess on buying things
Credit Cards: Pros and Cons
The ease in swiping a credit card for a purchase has its pros and cons. It may either
help when handled properly or become a detriment. If you are able to pay your
bills on time every month and not carry over a balance, credit cards are a great
convenience. The cards can also land you deep in debt. This often occurs if you're
unaware of the terms of the credit card agreement, and if you carry too many cards.
Use them practically everywhere, especially overseas.
They can boost your purchasing power because they can be used to buy
goods and services over the phone, through the mail and online.
They provide financial backup in the event of an emergency, such as an
unexpected healthcare cost, job loss or auto repair.
They allow you to purchase items and pay them off in monthly installments.
They offer discounts at stores and rewards. For instance, when you make
purchases using the credit card you can collect points; these points
accumulate and can be used to get free items, such as airline tickets.
Some cards may offer cash back as an incentive to use the card.
They can help build your credit history.

They keep a record of your expenses, helping you to monitor your financial
They help raise your credit score, such as the FICO credit score, when you
pay balances down by the due date. This improved credit history paves the
way for lower rates borrowing rates on other loans, including a mortgage.
Credit cards allow you the right to dispute billing errors and defective
They allow you withhold payments.
Credit cards can have their disadvantages, though, especially when they're
used in an unwise manner.
Some consumers feel compelled to spend more money than they have.
Consumers may continuously roll over a balance for several months.
When you default on credit card payments, you are charged with late fees
and interest, increasing your debt load.
Carrying a large amount of credit cards also isn't too favorable in the eyes of
Acquiring too much credit card debt can ruin your credit score.
Studies have indicated credit card debt as a significant factor in consumer
Credit card fraud is a possibility.
Avoiding Credit Card Pitfalls

In order to avoid the pitfalls of credit cards and maximize their benefits do the
1. Keep track of your purchases by closely reviewing your monthly statements.
2. Have a budget and avoid overspending.
3. Make an effort to pay off credit card balances at the end of the month.
4. Make purchases with reliable companies and take extra precautions when
making purchases online.
5. Report stolen cards immediately to the credit card company.

Advantages & Disadvantages of Settling Credit Card Debt

One big advantage of settling credit card debt is that you reduce the total amount
you owe. This means youll have less going out of your pocket every month to pay
your credit card bills -- or less debt piling up as interest, late fees and penalties if
you havent been making payments. Since these charges can equal or surpass the
original amount of your debt, removing all such charges benefits you. Settling the
debt will stop harassing phone calls and letters that you may have been getting
since you first fell behind on your payments.
Effect on Your Credit Score
Settling your credit card debt results in the creditor writing off a portion of the
debt. The settlement stays on your credit report for seven years and has a negative
impact on your credit report unless you can get the company to agree to list your
debt as fully satisfied, which doesnt happen often. Its still usually better to settle
than to have an ongoing pattern of missed payments, since negative information
becomes less important over time as long as you start making all of your payments
when theyre due.
Getting Your Bills Caught Up
Removing credit card debt makes it easier for you to create a budget and stick to it,
since theres fewer creditors you need to pay each month and more money

available to make your payments with. A good plan if youve fallen far behind on
payments is to settle what debts you can and then make a budget that you can stick
to. Prioritize your bills so that you cover the essentials, such as housing, food and
utilities first, and then allocate the rest of your money for paying off any other bills
you may have.
When the IRS Cares
When you pay off a credit card account by settling the debt, it can count against
you at tax time if the amount the company writes off as a result of the settlement is
more than $600. If it is, the credit card company or collection agency will send you
a 1099 form at the end of the year. You must add the amount of the write-off shown
on the 1099 to your income for the year and youll have to pay taxes on it just as
you would on money youve earned by working.

How Card Issuers Make Money

We at Nerd Wallet track thousands of credit cards, and each one is designed to
appeal to a particular type of customer base. The two major families of credit cards
out there include (i) low interest credit cards designed for people who do not pay
off their credit cards each month, and (ii) rewards credit cards designed for people
who pay off their credit cards each month and wish to earn something back for
their purchases.

How banks make money from credit card users that dont pay off
their bills
Most financial institutions that extend credit (like your credit card, auto loan, or
mortgage) make the bulk of their money from Net Interest Margin. Credit card
issuers first have to get cash that they can lend you, either by borrowing from other
lenders, or by getting their customers to open checking and savings accounts, and
each of these methods has a some cost. For example, Bank of America might have
a very low cost because they can use cash from peoples checking accounts, for
which they are only paying 0.05% interest, to extend a credit card line of credit
earning them 14.99%. In this example, Bank of America makes a 14.94% net
interest margin between what they are paying depositors, versus what they earn
from debtors.

The other factor that must be considered is default risk. If 5% of the credit card
holders do not pay back their debts, Bank of Americas net interest margin drops
from 14.94% to 9.94% (roughly). This is the risk that banking lobbyists have been
talking up when trying to justify high fees and interest rates to lawmakers.

How banks make money from credit card users that always pay off
their bills
Despite the prevalent idea that credit card companies consider these customers
deadbeats, the fact is that credit card companies make plenty of money from
people who pay their bills each month. Many card companies even prefer these
types of customers because they make this money with a lot less risk than they take
on for other customers.
Credit cards generate interchange revenue in the form of swipe fees every time
you use your credit card, the bulk of which is kicked back to the card issuing bank.
Interchange rates are often in the range of 2% to 3%, depending on what type of
card is used, what kind of merchant the card is used at, and even how big the
merchant happens to be. In practice, over 75% of this will go to the card issuing
bank, with the bulk of the remainder going to the payment processing network.
Merchant acquirers generally take a very small cut. For more details, see this

article we wrote about just how abusive credit card interchange rates have gotten,
due to the lack of credit card regulation in the United States.

Which type of customer is more valuable to banks?

Different banks target different bases of customers. For example, American
Express largely targets affluent, low-risk, high-spending customers, Capital One
divides the market into a number of segments and targets each separately, and
HSBC and GE Bank tend to target higher-risk customers with low or no credit.
Therefore, the earnings profile is very different between every company. There are
extremely profitable customers that generate a lot of interest payments and penalty
fees, as well as extremely profitable customers that spend furiously on their reward
If you would like more in depth information on interest income versus interchange
income, I recommend you take a glance at either American Express or Discover
SEC filings, both of which break out Discount Revenue (a closed loop networks
version of interchange rates), net of reward payouts, as well as net interest margins,
by quarter. Or just look over our own analysis of Discovers earnings a while back.

BIBLOGRAPHY (14/11/2015)
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