Credit Cards: Review - Report Example

Submitted By: XXXXX XXXXX of XXXXX Todays XXXXX Credit Cards Introduction: A credit card is an increasingly popular payment method. The word credit has been derived from Latin meaning ‘Trust’. Credit cards were first used in America in 1920, when American Express launched its first card with the motto ‘buy now, pay later’. This was the first step toward the world of credit cards. Post this in 1950, Diners Club and American Express launched the new charge cards in the USA and referred to it as plastic money. 1951 saw the launch of the first Diners club card which was given to 200 customers. The usage of the card was limited to 27 restaurants in New York. However it was only in 1970 that the magnetic strip was used on credit cards. A credit card falls under the category of plastic money. Here the card issuer, i.e. the bank, issues a card to the customer i.e. the card - holder. The issuer of the card provides its customer with a line of credit. The line of credit is the amount of credit a customer is eligible for to pay to merchants or even as cash advance. A credit card differs from the normal debit / charge card in the sense that a credit card does not require a complete payment at the end of the month. Instead it allows customers to ‘revolve’ the balance, by charging them with an interest instead. There are a number of different card issuers that provide these cards to the customers. A few of the well known card issuers in the United States are: Capital One Credit Cards, Discover Cards, HSBC Bank Credit Card, American Express Cards, Chase, Advanta, Master Card, Bank of America, Citi Credit Cards, First Premier Cards, VISA, etc. With the increasing growth of credit cards in the current world, it is important to understand what credit cards really are and how they work. This report focuses on understanding the basics of credit cards and the various aspects of credit cards, like the interest, benefits, eligibility criteria, etc. Getting a Credit Card: United States provides individuals with credit cards based entirely on the credit history of the individual. An individual with a positive history is most likely to receive a credit card. One of the biggest credits – checking company in the US is called EQUIFAX. This company provides for all details of financial standing of individuals i.e. the repayments history, timeliness in paying bills, etc. Apart from a good credit history it is also very important for individuals to have a social security number as this number acts as identification for all. Also primary identification like the passport is also needed. The above – mentioned points are the basic criteria for all credit cards. However different card issuers have a few different bases that need to be fulfilled to get a card from the company. Some of these are normally based on the income drawn by the individual. How Credit Cards Work: Once a credit card is got from a card issuer, the card can be used to make purchases at different merchants. The process of how credit cards work is very simple and straight – forward. When purchases are made, the cardholder is asked to sign the receipt of the purchase. This receipt basically means that the user agrees to pay the card issuer for the purchase at a later date. The receipt would normally contain the name, amount to be paid, and card details. For the merchants to ensure that the card holder has enough funds in the account or available credit in the card, an electronic verification is made. This is normally done using a point of sale terminal, which connects the merchant to the issuer of the card. The merchants request for authorisation from the issuers based on the magnetic strip of the card, by swiping the card through the point of sale terminal. To receive the information, the card – holder will be required to provide the personal identification pin. Once the issuer provides the merchant with a confirmation, the customer would require signing the receipt. Two copies of the receipt will be printed, one for the merchant, and the other for the records of the customer. This would complete the transaction. At the end of every month the customer is provided with a statement, which reflects all the transactions and the total amount payable, outstanding fees if any, and interest payable if any. It also mentions a minimum payment due on a due date, which the customer is required to pay. If this payment is not received on that day, then the customer will be charged with an interest, which is normally higher than the normal interest rates in other debts. The customers also have facilities to automatically deduct the payments from another bank account provided there are enough funds in that account. The next sections will discuss the various terms that have been used above like the interest, minimum balance, due date, fees, etc. and also other related terms. Minimum Balance: Minimum balance is an amount that the issuers set for every customer. This is normally based on the opening balance of the credit card. Most banks normally calculate the minimum amount due based as a percentage of balance due on the credit cards. This is normally 3% - 5% of the total amount due. Example: Total amount due: $ 24,000 Assuming the: minimum Payment percentage to be 3% Therefore the Minimum amount due = 3% of 24000 = $720 Due Date: A billing cycle is normally the period between two statement dates. This is normally a period of 30 days. At the end of a billing cycle, the card issuer normally fix a date as the payment due date for customers. This is the last date by which customers are required to make the payment of the minimum balance or as indicated by the statement. IF the payments are not made by this date, the customer would be liable to pay a late payment fee as well as an interest will be charged on the amount that is due. Fees: Late Payment Fees: This is a fee that is charged for not paying the minimum amount due in time. This can vary from 30% - 35% of the minimum amount due. Continuous default in paying of the minimum balance could affect the credit ratings as well as could lead to discontinuance of the card. Example: Total amount due: $ 24,000 Minimum amount due = $720 Due Date for Payment is 24th of November Payment made on 29th November Assuming Late Payment fee percentage is 33% Therefore Late Payment fee = 33 / 100 * 720 = $237.6 Over-limit fees: This is charged to the customer when the total amount due crosses the total available credit limit. The over limit is dependent upon the issuer and also on the credit limit on the card. Normally there is a fixed amount that is charged which varies $20 - $25 every time the card – holder goes above the total available credit limit. This is normally mentioned in the terms and conditions while issuing the card. Example: Total Credit Available: $24,000 Transaction at Merchant: $25,000 Therefore the customer will need to pay a fee of $ 25. However, if the customer does pay this amount and again goes over the limit he will need to pay another $25. In short this fee is not a one – time payment, it reoccurs every time the card – holder goes over the limit. Annual Membership fees: This is a fee that is levied by the issuers as a membership fee. However in the recent past with the increased competition, most companies do not charge annual membership fee. Interest Charges: This interest charge is levied, if the total balance amount due is not paid on or before the payment due date. If only the minimum amount due is paid, even then the interest is levied on the entire balance specified in the statement. If the minimum amount due is also not paid, then the interest charges plus the additional late payment fees (as discussed in the previous section) will be levied to the customer. The interest charge can be typically around 17%. For example, The Total Balance = $ 24,000 Minimum Amount Due = $ 720 Case 1: If the entire $ 24,000 is paid, Interest Charges = $ 0 Case 2: If only the Minimum Amount Due $ 720 is paid, Interest Charges = 17% of $ 24,000 = $ 4,080 Hence the total amount due will now be ($ 24,000 - $ 720 + $ 4,080) = $ 27,360 Case 3: If the minimum amount due is not paid, Late Payment Fees = $ 237.6 Interest Charges = $ 4,080 Hence the total amount due will now be ($ 24,000 + $ 237.6 + $ 4,080) = $ 28,317.6 Conclusion: Read More