Page 199 - Encyclopedia of Business and Finance

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Credit/Debit/Travel Cards

dence of the credit account typically took the form of a end of each month. Credit cards may also be used to make
card—the credit card. a cash advance from the bank. However, it should be
Since the 1920s, different types of credit cards have remembered that interest rates on cash advances using a
emerged. In addition, related types of cards have also credit card can be much higher than the rates for credit
appeared on the consumer scene: the debit card, as well as card purchases. Thus, the cash advance feature should be
the ATM card and the smart card, and the travel card and used wisely.
charge card. While at one time it was difficult to earn credit, the
process is far easier at the present time. Banks compete for
customers for their credit cards and often solicit college
CREDIT CARDS
students with limited capital and offer them credit cards.
A credit card is a pocket size, plastic card that allows the Telemarketing of credit cards is frequent. Low credit lim-
holder to make a purchase on a credit account that will be its are relatively easy to obtain. Demonstrating a solid pay-
repaid at some time in the future. Repayment may be in a ment record and growth in earnings then leads to higher
single amount or in a series of amounts. At a minimum, limits.
the credit card will include identification of the user by
Managing one’s credit is important to the consumer.
name, account number, and signature.
It is critical never to get into a position in which one has
The earliest issuance of credit cards in the United
so many credit cards and so many high balances that the
States was by gasoline companies and retail stores. Thus,
credit bills never get paid off. For example, if you have a
it was quite common in the first half of the twentieth cen- bank credit card with a balance of $1,000 and an interest
tury to carry a credit card from Esso, Sears, and/or a local rate of 18 percent a year or 0.083 percent a month (18
department store. These early cards were issued by the pri- percent divided by twelve months), the interest for the
vate company itself based on the credit policy of that com- current month will be $15 ($1,000 ¥ .015). If the pay-
pany. Many of the accounts were expected to be paid in ment made on the account this month is only $25, then
the month following purchase. Others were revolving the first $15 is for interest; the remaining $10 ($25–$15)
charge accounts in which partial payment was expected reduces the principal of $1,000 to $990 for the next
every month, with a charge for interest on amounts not month. In other words, more has been paid for interest
paid promptly. than for what was purchased; the situation in the follow-
If the balances of the credit accounts were not paid, ing month will change very little. At this rate of payment,
the issuing firm took the loss. Thus, deciding to issue a it could be several years before the balance is reduced to
credit card was a thoughtful process on the part of the firm. zero. In the meantime, if the card has been used for more
Often, the three Cs of credit were applied to a credit appli- purchases, the cycle of remaining in debt continues.
cant: character, capacity, and capital. Character referred to Credit card management is critical to a consumer. In fact,
the record of the applicant in paying previous accounts— one who has difficulty in dealing with credit cards might
his or her credit history. Capacity meant the earnings be better off with debit cards.
potential (salary) of the applicant. Capital referred to the
net assets (assets minus liabilities) of the person. Obtaining DEBIT CARDS
a credit card was far from an automatic process.
A debit card is also issued by a bank and looks like a credit
Major changes in the nature and types of credit cards card, but it works very differently. When one uses a debit
occurred in the 1950s. Two types of credit cards emerged card, the amount spent is deducted immediately from the
in that decade: the charge card and the bank credit card. user’s bank account. It is as if one is paying by check with-
The bank credit card expanded the idea of a credit out having to write a check. There will be no unpaid
card company to a much broader usage—virtually every future bills, for the payment is made at the time of the
merchant and service provider worldwide. The 1959 expenditure. For example, many people today purchase
BankAmericard from the Bank of America in California groceries with the debit card by running it through the
became the VISA card. The 1970s saw the birth of Mas- card reader at the grocery store check out counter. In addi-
ter Charge, which became MasterCard. These cards are tion, people often get extra cash while paying for the gro-
issued by banks, so one applies to a bank for the credit ceries with that debit card.
card. A preset credit limit is assigned to the card user. After It is helpful to know how a bank account works from
an item is charged at a firm, the firm receives payment the bank’s point of view to fully understand the debit card.
from the bank. The bank charges a fee to the firm, pays When an amount is added to a bank account, such as by
the firm the net amount, and then collects from the con- a deposit, the individual’s account is credited; when an
sumer. The consumer usually pays an annual fee to the amount is subtracted from that bank account, such as by
bank and is charged interest on the unpaid balance at the writing a check, the account is debited. Thus, the term

176 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION