Credit Cards
A credit card is a payment card, usually issued by a bank, allowing its users to purchase goods or services or withdraw cash on credit. Using the card thus accrues debt that has to be repaid later. Credit cards are one of the most widely used forms of payment across the world.
A regular credit card is different from a charge card, which requires the balance to be repaid in full each month or at the end of each statement cycle. In contrast, credit cards allow the consumers to build a continuing balance of debt, subject to interest being charged. 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. A credit card also differs from a debit card, which can be used like currency by the owner of the card.As of June 2018, there were 7.753 billion credit cards in the world. In 2020, there were 1.09 billion credit cards in circulation in the U.S and 72.5% of adults (187.3 million) in the country had at least one credit card.
Technical specifications
The size of most credit cards is 85.60 by 53.98 millimeters (3+3⁄8 in × 2+1⁄8 in) and rounded corners with a radius of 2.88–3.48 millimeters (9⁄80–11⁄80 in) conforming to the ISO/IEC 7810 ID-1 standard, the same size as ATM cards and other payment cards, such as cards. Most credit cards are made of plastic, but some are made from metal.
Credit cards have a printed or embossed bank card number complying with the ISO/IEC 7812 numbering standard. The card number’s prefix, called the Bank Identification Number (known in the industry as a BIN), is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs. This is the first six digits for MasterCard and Visa cards. The next nine digits are the individual account number, and the final digit is a validity check digit.
Both of these standards are maintained and further developed by ISO/IEC JTC 1/SC 17/WG 1. Credit cards have a magnetic stripe conforming to the ISO/IEC 7813. Most modern credit cards use smart card technology: they have a computer chip embedded in them as a security feature. In addition, complex smart cards, including peripherals such as a keypad, a display or a fingerprint sensor are increasingly used for credit cards.
In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and security codes. Complex smart cards allow having a variable security code, thus increasing security for online transactions. Not all credit cards have the same sets of extra codes nor do they use the same number of digits.
Credit card numbers and cardholder names were originally embossed, to allow for easy transfer of such information to charge slips printed on carbon paper forms. With the decline of paper slips, some credit cards are no longer embossed and in fact the card number is no longer in the front. In addition, some cards are now vertical in design, rather than horizontal.
Minimum payment
The cardholder must pay a defined minimum portion of the amount owed by a due date or may choose to pay a higher amount. The credit issuer charges interest on the unpaid balance if the billed amount is not paid in full (typically at a much higher rate than most other forms of debt). This impact accounts for roughly 8% of all interest ever paid. Thus, hiding the minimum payment option for automatic and manual payments and focusing on the total debt may mitigate the unwanted consequences of default minimum payments. In addition, if the cardholder fails to make at least the minimum payment by the due date, the issuer may impose a late fee or other penalties. To help mitigate this, some financial institutions can arrange for automatic payments to be deducted from the cardholder’s bank account, thus avoiding such penalties altogether, as long as the cardholder has sufficient funds.
In cases where the minimum payment is less than the finance charges and fees assessed during the billing cycle, the outstanding balance will increase in what is called negative amortization. This practice tends to increase credit risk and mask the lender’s portfolio quality and consequently has been banned in the U.S. since 2003.
Interest charges
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.
For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received. The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is (APR/100 x ADB)/365 x number of days revolved. Take the annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB). Divide the result by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as a residual retail finance charge (RRFC). Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the balance stopped revolving).
The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually, this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. If several interest rates apply to various balance segments, then payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue.
Grace period
A credit card’s grace period is
the time the cardholder has to pay the balance before interest is assessed on
the outstanding balance. Grace periods may vary but usually range from 20 to 55
days depending on the type of credit card and the issuing bank. Some policies
allow for reinstatement after certain conditions are met. Usually, if a
cardholder is late paying the balance, finance charges will be calculated and
the grace period does not apply. Finance charges incurred depend on the grace
period and balance; with most credit cards there is no grace period if there is
any outstanding balance from the previous billing cycle or statement (i.e.
interest is applied on both the previous balance and new transactions).
However, there are some credit cards that will only apply finance charges on
the previous or old balance, excluding new transactions.