Credit Cards

HISTORY:
The concept of using a card for purchases was described in
1887 byEdward Bellamyin his utopian novel
Looking Backward. Bellamy used the termcredit cardeleven
times in this novel, although this referred to a card for
spending acitizen's dividendrather than borrowing.
During 1914, a number of oil companies in United States issued
first card to their customers for the purpose of gasoline , oil and
accessories at the companies stations,
Western Union had begun issuing charge cards to its frequent
customers in 1921
In 1950, the Diners Club Inc , was the first company to issue
all-purpose card.
The Franklin National Bank of New York was , in 1951,the first
bank in United States to adopt a credit card and later on
American Express Company , Bank of America etc..

Definition:

A small plastic card that allows its holder

to buy goods and services on credit and
to pay at fixed intervals through the card
issuing agency.

What is Credit?
Credit Any situation in which
goods, services, or money are
received in exchange for a promise
to pay a definite sum of money at
a future date.

Why People Use Credit

For

Convenience
For Emergencies
For Identification
To Make Reservations
To Consume Expensive Products Sooner
To Enjoy the Good Life
To Take Advantage of Free Credit
To Consolidate Debts
For Protection Against Rip-Offs and
Frauds
To Obtain an Education

Mechanism of Credit card

operation
Customer

applies and gets the credit card

Arrangements are completed b/w the banker
and seller
The customer makes the actual purchases and
signs on the sale vouchers.
The seller sends the detailed vouchers to the
bank.
The bank settles the claims of the seller
The customer receives the intimation from the
bank in this regard.
The customer makes the payment for the
purchase made by him.

The Credit Approval Process:

Applying for Credit
Credit

Application Form or interview that

requests information about ability to repay debts.

Credit

Investigation Conducted by the lender

and used to assign a credit rating to the
applicant.

Credit

Rating The lenders evaluation of the

applicants creditworthiness.

Credit

Report A persons credit history as

reported by a credit bureau.

Credit

Bureau Company that gathers credit

behavior information about consumers from
lenders and sells reports on a credit applicant.

The Credit Approval Process: The

Credit Investigation (continued)
Credit Scoring (or Risk Scoring)
Statistical measure used to rate applicants
on the basis of factors deemed relevant to
creditworthiness and likelihood of repayment.
300s (worst) to 800s (best)
Key Factors:
Payment history
Amounts owed
Length of credit history
Taking on new debt
Types of credit used

The Credit Approval Process: The

Application Decision
The

lender decides whether to accept

the application and under what terms

Credit

Agreement (or Note)

Outlines the rules governing the
account.

Tiered

Pricing Lenders may offer

lower interest rates to applicants with
the highest credit scores while
charging steeper rates to more-risky

Building a Credit History

Establish

both a checking account and a

savings account.
Have your telephone and other utilities
billed in your name.
Request, acquire, and use an oilcompany credit card.
Apply for a bank credit card.
Ask a bank for a small short-term cash
loan.
Pay off student loans.

Credit Card Accounts

Minimum

Payment must be made

each month to cover interest and a
small payment on the amount owed,
if the borrower revolves a balance.

Principal
Default

the amount owed.

the borrower has failed to

make a payment of principal or
interest when due or has not met
another key requirement of a credit
agreement.

Bank Credit Cards

Bank

Credit Card Account an

open-ended account at a financial
institution that allows the holder to
make purchases almost anywhere.

Cash

Advance a cash loan from

a bank credit card account.

Convenience

Checks
customers can use these checks as
cash advances to make payments
to others.

Bank Credit Cards (Continued)

Balance

Transfer a payment is
used to make a payment on another
credit card.

Prestige

Card offer enhancements

and require that the user possess
higher credit qualifications.

Affinity

Cards standard bank cards

with the logo of a sponsoring
organization imprinted on the face of
the card.

Secured Credit Cards

Secured Credit Card (or
Collateralized Credit Card) Backed
by collateral in the form of a savings
account opened at the financial
institution that issues the card.
Example:
Deposit $1,000 with creditor to
borrow $1,000

Travel and Entertainment

Cards
Travel

and Entertainment
(T&E) Cards Allow holders to
make purchases at numerous
businesses, but the entire
balance charged must be repaid
within 30 days.

American Express
Diners Club
Carte Blanche

Credit Card Statements

Billing

Date- (Sometimes called the

Closing Date or Statement Date) is the
last date of the month for which any
transactions are reported; this is
generally the same date each month
Due Date- Date, specified by credit
card company, of when they should
receive payment
The period between the billing date and
due date is usually about 20-25 days
Watch the fine print! (Example: time of
payment)

Credit Statements
(Continued)
Transaction

and Posting Dates- Date on

which the credit card holder makes a
purchase or receives a credit

Grace

Period Time period between the

posting date of a transaction and the due
date, within which any new credit card
purchases made during the billing cycle will
avoid finance charges.

Minimum

Payments- To meet his/her

obligations, a cardholder must make a
minimum payment each month; finance
charges are assessed thereafter

Advantages of credit card

Benefits

to the bank
Benefits to the
customer(cardholder)
Benefits to the retailer

Benefits to the bank

Opportunity

to attract customers
Better profit for the banks out of
commission earned from trade
turnover
Additional customer
services,enhancing customer
satisfaction
National business growth and
banking habits
Popularity of the bank

Continued..
High

customers into bank by

introducing various types like
Gold card,Executive card.
Creates brand name and popular
image of bank
Increase interest income for bank
by availing loan through cards
Reduces credit risk financially
screened
Increase banking relationship

Benefits to cardholder
Purchase

goods and services at a large

number of outlets without cash or cheque .
Reduce handling charges of bank.
Free credit b/w 30-50 days of purchase
Used as identification
Extending credit .
Proof of spending.
Single payment
Free insurance ,discount on purchase.
Status symbol

Benefits to retailers
High

status weightage to outlets.

Increase in sale
No botheration of bad debts
Timely payments
Systematic accounting
Less customer problems

Profitability

Value

of the average transaction

Rate of merchant discount
Cost of bank money
Cost of processing
Rate of cardholder service charge
Average pattern of repayment
Loss from bad debts and fraud.

Disadvantages
Only

few outlets accept credit cards

Some transactions take longer time.
Customer tend to overspend
Discounts and rebates are rare
Cardholder is responsible for loss or
theft of card
Denial of discounts payment through
card
Lead to extravagant spending habits
and end up in big debts.