How credit card works
A credit card issuing company, such
as a bank or credit union, would enter into agreements with merchants for them
to accept their credit cards. Merchants of ten advertise which cards they
accept by displaying acceptance marks-generally derived from logos-or may
communicate this orally, as in “we take brands X,Y and Z” or “ we don’t take
credit cards”.
The credit
card issuer would issue a credit card to a customer at the time or after an
account has been approved by the credit provider, which need not be the same
entity as the card issuer. The card holders can then use it to make purchases
at merchants accepting the card.
CLASSIFICATION OF CREDIT CARDS
- Advertising, solicitation application and approval
- Interest charges
- Benefits to card holder
- Detriments to customers
- Detriments to society
- Grace period
- benefits to marchants
- cost to merchants
adverting, solicition, application and approval
credit
card advertising regulations in the US include the schumer box disclosure
requirements. A large fraction of junk mail consists of credit card offers
created from lists provided by the major credit reporting agencies.
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 out standing
balance from the date of each purchase if the total balance is not paid.
Benefits to cardholders
The main benefit to the card holder is convenience. Compared
to debit cards and checks, a credit card allows small short-term loans to be
quickly made to a card holder who need not calculate a balance remaining before
every transection, provided the provided the total charges do not exceed the
maximum credit line for the card.
Detriments to customers
Introductory credit card rates are limited to
a fixed term, usually between 6 and 12 months, after which a higher rate is
charged.
Several
studies have shown that consumers are likely to spend more money when they pay
by credit card.
Detriments to society
Merchants
that accept credit cards must pay interchange fees and discount fees on all
credit card transactions.
Grace period
A Credit card grace period is the time customer
has to play 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.
Benefits to merchants
Prior to credits card each merchant had to
evaluate each customer’s credit history before extending credit. That task is
now perfomed by the banks which assume the credit risk. Credit cards can also
aid in securing a sale. Especially if the customer does not have enough cash on
his or her person or checking account.
Costs to merchants
The merchants
are charged several fees for accepting credit cards. The merchant is usually
charged a commission of around 1 to4 % of the value of each transaction paid
for by credit card.
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