Credit
cards, as the name suggest, enable people to obtain instant credit either
against goods bought or for cash from a cash dispenser. Obtaining credit for
goods involves the retailer filling in a docket either manually or by using the
till and then asking the customer to sign the docket. If the card signature and
the signature on the docket are the same then the customer is given the goods
and the retailer sends the docket to the credit card company, where the
transaction is recorded and the retailer paid. The cardholder receives a
statement at the end of each month which outlines:
•
The balance at the start of the month
•
The interest payable on this outstanding balance
•
The amounts and details of any transactions that have taken place during the month
•
The balance owing at the end of the month
The
cardholder is then able to make the decision on how much of the balance he
wishes to pay off provided that it is greater than the minimum payment
specified by the credit card company. It is now very common for there to
be no documentation at the time of purchase, since so many goods and services
are bought by phone with credit cards or debit cards.
A
credit card company enrolls retailers, garages and other businesses that are
prepared to accept its credit cards. It also invites applications from
individual people who wish to use the card. These people must have a minimum level
of income, e.g. $30 000 a year in Singapore. Each cardholder is given a credit
limit. This is the maximum amount that the cardholder can have on credit. The
credit limit may vary. New customers may have a low credit limit. As they use
the card, the credit limit increases. The customer can, however, refuse to have
an increased limit.
The
cardholder purchases goods and services using the card. He or she may sign a
counterfoil but nowadays the chip and pin technique is becoming more
widespread. This enables the card number to be validated - enough credit available
to make the purchase - and to check that the card has not been stolen. The
cardholder is given a copy of the bill. The retailer keeps a copy. Another,
signed copy is sent to the credit card company. See the below diagram.
The
credit card company charges the business commission on sales. It pays the
business at regular intervals less the commission which may be as much as 3 per
cent of the sales figure. The cardholder receives monthly statements showing
the transactions for the previous month and the total amount owed. The
cardholder can pay off the whole amount owed at the end of the month without
paying interest or can pay a proportion. Interest is charged if the amount is
not paid off in full and this is shown on the statement. If debts are carried over,
there is usually a minimum repayment of 2-3 per cent of the balance each month.
It
is also possible to obtain a cash advance using a credit card at a bank or
using an Automatic Teller Machine (ATM). Interest is charged from the day the
cash is withdrawn and a handling charge is also made. It is not advisable to
use a credit card to obtain cash for these reasons but this service can be
useful to obtain cash quickly and easily in a foreign country. MasterCard and
Visa credit cards are issued by most of the major banks. They are also issued
by other organizations such as large stores and charities. Some credit cards
offer zero per cent or low rates of interest to new account holders for a
limited period to attract new business. Some credit cards offer rewards,
loyalty points or cash back in return for full payments each month.
Many
credit cards offer extra benefits to cardholders. They may offer free purchase protection
insurance which covers the consumer if purchases are damaged or stolen while being
delivered. Credit card companies also offer 24 hour assistance if a card is
lost or stolen. There may also be insurance cover offered to protect against
cards being misused when lost or stolen.
Payments
on credit cards can be made in person at a bank, by telephone or online. Some
credit card companies charge an annual fee to cardholders. Extra payments are charged
by the credit card company if the cardholder exceeds the credit limit on the
card or if monthly payments are not made on time.
Most
consumers in developed countries use credit cards. In some countries they are disliked
for religious and moral reasons. However, across the world, the number of
credit cards in circulation is steadily increasing as many countries move towards
the cashless society. In China, there were 40 million credit cards in
circulation in 2005. This rose to 56 million in 2006 showing an increase of 40
per cent.
Advantages
to the Credit Card Holder
•
Credit cards provide instant credit and are simple and quick to use.
•
It is safer to carry a credit card than to carry a large sum of money.
•
Free credit can be obtained for at least a month. It is possible to obtain up
to eight weeks' free credit if purchases are made at a particular time in the
month.
•
Credit cards can be used in many different outlets, e.g. shops, hotels,
garages, restaurants and in many different countries.
•
Credit card companies may offer zero per cent interest for up to twelve months
to transfer balances from another credit card. This may help people to avoid
the interest payments on arrears.
•
Credit cards can be used to obtain cash advances in the currency of the country
you are in.
•
If the cardholder is a business person, the credit card can be used to charge
expenses. The business person does not have to use his/her own money and,
hopefully, the expenses would be paid before the credit card payment is due.
Disadvantages
to the Credit Card Holder
•
Although credit cards are used worldwide, they are still not accepted in many outlets.
For example, in Pakistan, credit cards are accepted in the top range of hotels
but they are not accepted in the majority of budget hotels. The up-market shops
and restaurants do accept them and cash advances can be obtained at some banks
but not those in the smaller towns.
•
The rate of interest charged is higher than that for other forms of credit and
for a bank loan.
•
Consumers tend to be tempted to spend more than they should and so are unable
to pay off the debt at the end of the month.
• Sometimes prices are higher
because the retailer wishes to cover the commission charged by the credit card
company.
•
If a card is stolen or 'cloned' i.e. copied, many unauthorized transactions may
result before the fraud is discovered.
•
If a card is lost or stolen and the cardholder does not inform the credit card
company, the cardholder could be liable for losses resulting from the misuse of
the card.
Advantages
to Businesses of Accepting Credit Cards
•
Accepting credit cards usually means that a business increases sales. It may
also give the business a competitive edge over any rival businesses that do not
accept credit cards.
•
The business does not have to hold too much cash on the premises which reduces the
security risks to the business.
Disadvantages
to Businesses of Accepting Credit Cards
•
The businesses are charged some commission by the credit card companies.
•
Accepting credit cards increases the paperwork and the records need to be kept.
•
Extra time is needed to check for stolen cards and credit limits of customers.
•
Businesses selling large quantities of goods on credit may experience delays in
receiving the payments. This does not help their cash flow.
•
Credit card fraud and bad debts may mean losses to the credit card company.
Credit
cards should not be confused with charge cards such as Diner's Club or American
Express. These organizations require cardholders to pay off their bills monthly
by an agreed date. No arrears can be carried forward.
Security
of Credit Cards and Credit Card Fraud
Credit
card fraud is a major concern for most cardholders. In the UK, credit card
fraud totaled over £200m in the first half of 2006 with online, phone and mail
order fraud continuing to increase. It is estimated that one in ten of the
people making online transactions in the UK is the victim of some kind of
fraud, each losing £845 on average. Perhaps these figures are not surprising as
over 26 million people shop online each year making an estimated 380 million
transactions.
Credit
card fraud costs the credit card companies hundreds of millions of pounds each year.
It is not surprising that ways of reducing this fraud have been looked into. One way around the problem is to authorize each
transaction as it occurs by checking via the phone or a special terminal
whether the card has been stolen. Another way is to make people key in their
PIN at the checkout when making purchases using credit or payment cards.
To
make shopping online more secure, Visa and MasterCard offer increased
protection for credit card payments. Retailers are invited to participate in MasterCard
Secure Code and Verified by Visa, security systems where the shopper has to
register and is given an individual password. Online transactions cannot be made
without the use of the password to authenticate the identity of the cardholder,
thus protecting the cardholder against unauthorized use of the card.
The
Chip and Pin system has also helped to reduce credit card fraud in the
countries where it has been introduced. Credit card account holders are given a
unique four-digit PIN number (Personal Identification Number) e.g. 1234. When
the card is used, the pin number is keyed into the pin pad.
An
authentication system based on Chip and Pin, for use both online and when buying
on the telephone, has been developed. The system works via a cardholder
inserting his/her chip and pin card into a hand-held card reader and entering
the pin number. On validating the pin number entered, the reader generates a unique,
one-time only password which the cardholder provides to the seller for
authentication with the cardholder's bank.
Most
credit card companies have fraud detection systems to check for any unusual
activity (unusually large purchases) on an account. Zero Online Fraud Liability
may also be offered. If a credit card is used to make payments online, the cardholder
will not have to pay for online transactions made without the cardholder's authority.
Biometric
testing can also be performed, whereby the user places an index finger into a
machine which compares the fingerprint with one previously recorded. Another method
looks at the way a person writes a signature by concentrating on the timing,
the rhythm and the invisible pen movements. There are also systems which use the
pattern on the retina of a person's eye or fingerprint being checked. Credit
card companies also offer 24 hour worldwide assistance if a card is lost or stolen
overseas. There may also be insurance cover offered to protect against cards
being misused when lost or stolen.
Tips to Credit Card Holders to Reduce Fraud by:
•
Never disclosing the pin number of the card to anyone.
•
Not allowing card details out of sight when making a transaction (particularly
in restaurants).
•
Shredding all unwanted cards and credit card statements.
•
Ignoring unsolicited emails about pin numbers.
•
Shielding the screen when entering the pin number in a shop or cash machine.
•
Giving card details on the telephone only when you have made the telephone call
and when you are familiar with the company you are calling.
•
Using only secure websites showing the security icon (locked padlock or
unbroken key symbol). The beginning of the retailers’ web address will change
from 'http' to 'https' when a purchase is made using a secure connection.
•
Using a protected computer. The computer should have anti-virus software and a firewall.
•
Opening a separate Internet-only credit card for online purchases only with a
low credit limit.
