Credit Cards

HISTORY:
The concept of using a card for purchases was described in
1887 by Edward Bellamy in his utopian novel 
Looking Backward. Bellamy used the term credit card eleven
times in this novel, although this referred to a card for
spending a citizen's dividend rather than borrowing.
During 1914, a number of oil companies in United States issued
first card to their customers for the purpose of gasoline , oil and
accessories at the companies’ stations,
 Western Union had begun issuing charge cards to its frequent
customers in 1921
In 1950, the Diners’ Club Inc , was the first company to issue
all-purpose card.
The Franklin National Bank of New York was , in 1951,the first
bank in United States to adopt a credit card and later on
American Express Company , Bank of America etc…..

Definition:

“A small plastic card that allows its holder
to buy goods and services on credit and
to pay at fixed intervals through the card
issuing agency.”

What is Credit?
Credit – Any situation in which
goods, services, or money are
received in exchange for a promise
to pay a definite sum of money at
a future date.

Why People Use Credit
For

Convenience
For Emergencies
For Identification
To Make Reservations
To Consume Expensive Products Sooner
To Enjoy the Good Life
To Take Advantage of Free Credit
To Consolidate Debts
For Protection Against Rip-Offs and
Frauds
To Obtain an Education

Mechanism of Credit card
operation
 Customer

applies and gets the credit card
 Arrangements are completed b/w the banker
and seller
 The customer makes the actual purchases and
signs on the sale vouchers.
 The seller sends the detailed vouchers to the
bank.
 The bank settles the claims of the seller
 The customer receives the intimation from the
bank in this regard.
 The customer makes the payment for the
purchase made by him.

The Credit Approval Process:
Applying for Credit
Credit

Application – Form or interview that
requests information about ability to repay debts.

Credit

Investigation – Conducted by the lender
and used to assign a credit rating to the
applicant.

Credit

Rating – The lender’s evaluation of the
applicant’s creditworthiness.

Credit

Report – A person’s credit history as
reported by a credit bureau.

Credit

Bureau – Company that gathers credit
behavior information about consumers from
lenders and sells reports on a credit applicant.

The Credit Approval Process: The
Credit Investigation (continued)
Credit Scoring (or Risk Scoring) –
Statistical measure used to rate applicants
on the basis of factors deemed relevant to
creditworthiness and likelihood of repayment.
◦ 300s (worst) to 800s (best)
Key Factors:
◦ Payment history
◦ Amounts owed
◦ Length of credit history
◦ Taking on new debt
◦ Types of credit used

The Credit Approval Process: The
Application Decision
The

lender decides whether to accept
the application and under what terms

Credit

Agreement (or Note) –
Outlines the rules governing the
account.

Tiered

Pricing – Lenders may offer
lower interest rates to applicants with
the highest credit scores while
charging steeper rates to more-risky

Building a Credit History
Establish

both a checking account and a
savings account.
Have your telephone and other utilities
billed in your name.
Request, acquire, and use an oilcompany credit card.
Apply for a bank credit card.
Ask a bank for a small short-term cash
loan.
Pay off student loans.

Credit Card Accounts
Minimum

Payment – must be made
each month to cover interest and a
small payment on the amount owed,
if the borrower revolves a balance.

Principal
Default

– the amount owed.

– the borrower has failed to
make a payment of principal or
interest when due or has not met
another key requirement of a credit
agreement.

Bank Credit Cards
Bank

Credit Card Account – an
open-ended account at a financial
institution that allows the holder to
make purchases almost anywhere.

Cash

Advance – a cash loan from
a bank credit card account.

Convenience

Checks –
customers can use these checks as
cash advances to make payments
to others.

Bank Credit Cards (Continued)
Balance

Transfer – a payment is
used to make a payment on another
credit card.

Prestige

Card – offer enhancements
and require that the user possess
higher credit qualifications.

Affinity

Cards – standard bank cards
with the logo of a sponsoring
organization imprinted on the face of
the card.

Secured Credit Cards
Secured Credit Card (or
Collateralized Credit Card) – Backed
by collateral in the form of a savings
account opened at the financial
institution that issues the card.
Example:
Deposit $1,000 with creditor to
borrow $1,000

Travel and Entertainment
Cards
Travel

and Entertainment
(T&E) Cards – Allow holders to
make purchases at numerous
businesses, but the entire
balance charged must be repaid
within 30 days.

• American Express
• Diner’s Club
• Carte Blanche

Credit Card Statements
Billing

Date- (Sometimes called the
Closing Date or Statement Date) is the
last date of the month for which any
transactions are reported; this is
generally the same date each month
Due Date- Date, specified by credit
card company, of when they should
receive payment
◦ The period between the billing date and
due date is usually about 20-25 days
◦ Watch the fine print! (Example: time of
payment)

Credit Statements
(Continued)
Transaction

and Posting Dates- Date on
which the credit card holder makes a
purchase or receives a credit

Grace

Period – Time period between the
posting date of a transaction and the due
date, within which any new credit card
purchases made during the billing cycle will
avoid finance charges.

Minimum

Payments- To meet his/her
obligations, a cardholder must make a
minimum payment each month; finance
charges are assessed thereafter

Advantages of credit card
Benefits

to the bank
Benefits to the
customer(cardholder)
Benefits to the retailer

Benefits to the bank
Opportunity

to attract customers
Better profit for the banks out of
commission earned from trade
turnover
Additional customer
services,enhancing customer
satisfaction
National business growth and
banking habits
Popularity of the bank

Continued..
High

customers into bank by
introducing various types like
Gold card,Executive card.
Creates brand name and popular
image of bank
Increase interest income for bank
by availing loan through cards
Reduces credit risk –financially
screened
Increase banking relationship

Benefits to cardholder
Purchase

goods and services at a large
number of outlets without cash or cheque .
Reduce handling charges of bank.
Free credit b/w 30-50 days of purchase
Used as identification
Extending credit .
Proof of spending.
Single payment
Free insurance ,discount on purchase.
Status symbol

Benefits to retailers
High

status weightage to outlets.
Increase in sale
No botheration of bad debts
Timely payments
Systematic accounting
Less customer problems

Profitability

Value

of the average transaction
Rate of merchant discount
Cost of bank money
Cost of processing
Rate of cardholder service charge
Average pattern of repayment
Loss from bad debts and fraud.

Disadvantages
Only

few outlets accept credit cards
Some transactions take longer time.
Customer tend to overspend
Discounts and rebates are rare
Cardholder is responsible for loss or
theft of card
Denial of discounts –payment through
card
Lead to extravagant spending habits
and end up in big debts.