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How Credit Cards Work
Have you ever stood behind someone in line at the store and
watched him shuffle through a stack of what must be at least 10 credit cards?
Consumers with this many cards are still in the minority, but experts say that
the majority of U.S. citizens have at least one credit card -- and usually two
or three. It's true that credit cards have become important sources of
identification -- if you want to rent a car, for example, you really need a
major credit card. And used wisely, a credit card can provide convenience and
allow you to make purchases with nearly a month to pay for them before finance
charges kick in. That sounds good, in theory. But in reality, many consumers
are unable to take advantage of these benefits because they carry a balance on
their credit card from month to month, paying finance charges that can go up to
a whopping 23 percent. Many find it hard to resist using the old "plastic" for
impulse purchases or buying things they really can't afford. The numbers are
striking: In 1999, American consumers charged about $1.2 trillion on their
general-purpose credit cards. In this article we'll look at the credit card
-- how it works both financially and technically -- and we'll offer tips on how
to shop for a credit card. (Experts say this should be a project on the scale of
shopping for a car loan. We'll also describe the different credit-card plans
available, talk about your credit history and how that might affect your card
options, and discuss how to avoid credit-card fraud -- both online and in the
real world.
A Bit of History Let's start at the beginning. A
credit card is a thin plastic card, usually 3-1/8 inches by 2-1/8 inches in
size, that contains identification information such as a signature or picture,
and authorizes the person named on it to charge purchases or services to his
account -- charges for which he will be billed periodically. Today, the
information on the card is read by automated teller machines
(ATMs), store readers, and bank and Internet
computers. According to Encyclopedia Britannica , the use of credit
cards originated in the United States during the 1920s, when individual
companies, such as hotel chains and oil companies, began
issuing them to customers for purchases made at those businesses. This use
increased significantly after World War II. The first universal credit
card -- one that could be used at a variety of stores and businesses -- was
introduced by Diners Club, Inc., in 1950. With this system, the
credit-card company charged cardholders an annual fee and billed them on a
monthly or yearly basis. Another major universal card -- "Don't leave home
without it!" -- was established in 1958 by the American Express
company. Later came the bank credit-card system. Under this
plan, the bank credits the account of the merchant as sales slips are received
(this means merchants are paid quickly -- something they love!) and assembles
charges to be billed to the cardholder at the end of the billing period. The
cardholder, in turn, pays the bank either the entire balance or in monthly
installments with interest (sometimes called carrying charges). The
first national bank plan was BankAmericard, which was started on a
statewide basis in 1959 by the Bank of America in California. This system
was licensed in other states starting in 1966, and was renamed Visa
in
1976. Other major bank cards followed, including MasterCard, formerly Master Charge. In order to offer
expanded services, such as meals and lodging, many smaller banks that earlier
offered credit cards on a local or regional basis formed relationships with
large national or international banks.