The Good, The Bad, and the Ugly Credit Cards The Good, The Bad, and the Ugly Judith Walker

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

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

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

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

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

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

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

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

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%

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

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

Credit Score Three-digit rating that estimates how ‘trustworthy’ concerning repayment Affects loan qualification, credit limits, interest rates

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

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

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

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

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

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

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

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

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

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