1. The Good, The Bad, and the Ugly
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 other’s 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 Credit 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 – it’s 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 >720 good
Score <600 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 Chargeback Fraud Skimming
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