Credit Cards

1
Credit Cards

• The Good, The Bad, and the Ugly

Judith Walker
2
History

• In the US first used in the 1920s to sell fuel to
  the growing number of car owners
• In 1938 companies started accepting each others
  cards

3
History

• Concept of paying merchants using a card
  developed by Ralph Schneider and Frank X.
  McNamara in 1950 to consolidate individual cards
• Diners Club produced the first charge card
• The BankAmericard was developed in 1958 and
  evolved into Visa
• MasterCard was introduced in 1966

4
Different Card Types

• Debit Card
• Card directly connected to an account where money
  is removed directly from that account
• Credit Card
• Card issuer lends consumer money not in an
  account, can revolve balance
• Charge Card (? Credit Card)
• Similar to credit charge except in must be paid
  in full each month

5
Merchants

• Second most secure form of payment
• Most secure is cash in hand
• Issuing bank commits to payment at the moment of
  verification
• Merchant charged commission for the privilege of
  the service
• It is a privilege to be able to accept credit
  cards and it can be removed due to violations by
  the merchant

6
Number System

• The first digit in your credit-card number
  signifies the system
• 3 - travel/entertainment cards (Amer. Express
  Diners Club)
• 4 - Visa
• 5 - MasterCard
• 6 - Discover Card
• Phone companies, gas companies and department
  stores have their own numbering systems

7
How They Work Consumer

• Consumer is approved for a certain level of
  credit based on income and credit history
• Electronic verification system (magnetic strip)
  verifies card validity and if there is sufficient
  credit to cover purchase
• Statement sent each month to consumer with total
  balance and payment requirements

8
Magstripe

• Magstripe the magnetic strip on the back of the
  card
• made up of tiny iron-based magnetic particles in
  a plastic-like film. Each particle is really a
  tiny bar magnet about 20-millionths of an inch
  long
• The magstripe can be "written" because the tiny
  bar magnets can be magnetized in either a north
  or south pole direction. The magstripe is very
  similar to a piece of cassette tape

9
Credit Card Pin

• PIN personal identification number
• The PIN is not on the card its encrypted
  (hidden in code) in a database
• The PIN can be either in the bank's computers in
  an encrypted form or encrypted on the card itself
  
• The transformation used in this type of
  cryptography is called one-way
• This feature was designed to protect the
  cardholder from being impersonated by someone who
  has access to the bank's computer files

10
Interest

• Pay in full each month, no interest accrued
• Not paid in full
• Typically full interest on the entire outstanding
  balance each month from the date of purchase if
  the balance is not paid
• Interest rates will jump drastically if late with
  just ONE payment
• In some cases rates will double
• Often delinquency will result in rates of 25-30

11
Interest

• 4 common methods of charging interest
• Detailed in Regulation Z of the Truth in Lending
  Act
• Average Daily Balance
• Two-Cycle Average Daily Balance
• Adjusted Balance
• Previous Balance
• The UK uses the Daily Accrual method

12
Incentives

• Frequent Flyer Miles
• Gift certificates
• Cash back (usually one 1)
• Donation to charity or cause
• Environmental
• National Geographic

13
Credit Score

• Three-digit rating that estimates how
  trustworthy concerning repayment
• Affects loan qualification, credit limits,
  interest rates

14
FICO Score

• Best known US credit score
• Developed by Fair Isaac Corporation
• Use a statistical model to generate a score and
  compare with other individuals with similar
  history
• Models subject to federal regulation
• Regulation B
• Specific reasons must be given for denial

15
FICO Score Components

• Exact distribution closely guarded
• 35 punctuality of payment
• 30 capacity used
• 15 length of history
• 10 types of credit
• 10 recent credit search/obtained

16
FICO Score

• Current income and employment history do not
  factor into the score but are weighed when
  applying for credit
• Range from 300 to 850
• US median around 725
• Score gt720 good
• Score lt600 poor

17
How to Improve Credit Score

• Check report for accuracy
• Pay on time
• Clean up derogatory statements
• Decrease capacity used
• Establish a credit history
• Minimize damage in difficult times
• Limit credit inquiries

18
Secured Credit Cards

• Credit card secured by a deposit account owned by
  the cardholder
• Generally 100 to 200 of the desired credit
• Still make payments as if it was a regular credit
  card
• Default on payment, lose security and can accrue
  additional debt due to interest
• Sometimes the only option to rebuild credit

19
Fair Credit Reporting Act

• American Federal Law
• 15 U.S.C. 1681
• Regulates the collection, dissemination, and use
  of consumer credit information
• Regulates credit reporting agencies
• In 2003 the act was amended to guard against
  identity theft

20
Credit Card Fraud

• The type of fraud where a merchant is accepts a
  card under the assumption the account will
  provide payment
• Later the merchant does not receive payment or it
  is reclaimed by the issuing bank
• Today half of all credit card fraud is conducted
  online

21
Types of Fraud

• Mail Non-Receipt
• Theft of mail containing a replacement card
• Chargeback Fraud
• Bank notified that illegal purchases were made
  and they charge payment is taken back from the
  merchant
• Skimming
• Merchant copies the magnetic strip illegally

22
Fraud Prevention

• Card-Present
• Signed receipt that matches signature on back of
  the credit card
• Show photo identification
• Checking the last 4 digits on the card

23
Fraud Prevention

• Card Not Present
• Telephone or on-line purchases
• Fax copies of the credit card along with photo
  identification
• Card Security Code on the back of the credit card