A credit card is an access card to a line of credit issued by a bank. It is intended to be used as a revolving account, meaning that consumers are assigned a credit limit and may make any purchase that doesn't exceed that limit, but must make either partial or full payments every month. As long as customers have available credit and their payments are up to date, they may continue to make purchases using the card up to their credit limit. Credit cards make it easier and more convenient for a consumer make purchases inasmuch as:
- cardholders do not need to carry cash;
- cardholders can make purchases and pay them off over time allowing them to buy things even if they do not have enough money in their bank account to pay for them at the time of purchase;
- cardholders are protected against many billing errors by merchants and from fraud.
Some predict that credit cards will soon make paper and coin money obsolete. But in exchange for this convenience, a credit card has costs and dangers.
Credit cards compete with debit cards for handling purchases and other transactions. Unlike a credit card where money is automatically loaned to the cardholder between the time of the purchase and the time of a later payment, a debit card withdraws money from a bank account at the time of purchase. Federal laws extend consumer protections to credit cards, but these protections are not required to cover debit cards. Additionally, Credit card companies charge a transaction fee to the merchant, so the user is aware of paying nothing extra. However, debit cards often charge (lower) transaction fees directly to the cardholder.
- A purchase made on a credit card is a loan, and interest (called a "finance charge") is charged after the allowed time. The interest rate can be very high; rates of 18% to 24% per year are not unusual, though consumers with good credit scores are often given more competitive rates. Because banks take a larger risk in issuing unsecured lines of credit, the rates are often higher than other secured consumer loans like auto loans or mortgages. Almost all cards allow the customer to pay the bill off in full each month and thereby avoid interest charges.
- If a customer does not send in a payment prior to the due date, the credit card company will often charge a late fee. These fees typically range from $25 to $50.
- Credit cards are lucrative profit channel for banks because of the interest rates and the fees the banks charge the merchants for using the cards. The higher a balance revolved by the customer, the greater the profit for the bank. Banks are required by law to require customers to pay a minimum monthly payment of at least 1% of the total balance plus interest.
- Because a credit card is an open line of credit, they require disciplined use. If a customer is assigned a credit line with a minimum payment higher than they can afford, they must take care not to charge too much on the card.
If a consumer makes a credit card purchase and the merchant doesn't send the item, or it is not the way the merchant described it, the consumer is protected from having to pay for the item in most cases.
The customer has the right to dispute the transaction with their bank or credit card company. The company is required to investigate the customer's dispute and issue a chargeback to the merchant if it is found that the customer was charged improperly. However, if the merchant is able to show that they charged the customer properly, then they have the right to represent the charge to the customer's bank. For example, if a customer fails to cancel a recurring transaction but disputes the item anyway with their bank the merchant may present a contract showing that the customer failed to cancel, and the customer will be responsible for paying for the item.
Charge cards which required customers to pay the balance in full every month have been in existence since the late 1800s. The first true credit card was invented in 1958 by Bank of America. The BankAmericard eventually became so widespread that it was spun off from Bank of America and became the agency now known as Visa. Credit card use became increasingly popular in the 1960s and 1970s. Before credit cards, travel was more difficult because travelers needed to carry money, purchase travelers checks, or make special arrangements in advance with banks in the cities they were traveling to. Mail order purchases were made by check, and were very slow, because most companies would wait for the check to clear before shipping the product.
Today, credit cards are governed by four major organizations: Visa, MasterCard, American Express, and Discover. Visa and MasterCard allow banks and credit card companies to issue cards for use on their respective networks, whereas American Express (AMEX) and Discover issue and service cards themselves. 144 million Americans have a general purpose credit card, but there are approximately 641 million cards in circulation. Consumers revolved approximately $904 billion in June 2007, although it is estimated that only 55 million Americans pay their credit card bill in full every month, another 35 million pay only the minimum.
- On average, today's consumer has a total of 13 credit obligations on record at a credit bureau. The average consumer's oldest obligation is 14 years old, indicating that he or she has been managing credit for some time. In fact, one out of four consumers had credit histories of 20 years or longer. Only one in 20 consumers had credit histories shorter than two years.
- Average credit card debt per household—regardless of whether they have a credit card or not—was $8,329 at the end of 2008. The average outstanding credit card debt for households that have a credit card was $10,679 at the end of 2008.
- In 2007, before the recession began, 14.7 percent of U.S. families had debt exceeding 40 percent of their income.
- Undergraduates are carrying record-high credit card balances. The average (mean) balance grew to $3,173, the highest in the years the study has been conducted. Median debt grew from 2004’s $946 to $1,645. Twenty-one percent of undergraduates had balances of between $3,000 and $7,000, also up from the last study.
- Average credit card debt among indebted young adults increased by 55 percent between 1992 and 2001, to $4,088. The average credit card indebted young adult household now spends nearly 24 percent of its income on debt payments, four percentage points more, on average, than young adults did in 1992.
- Of the 73.0 percent of families with credit cards in 2007, only 60.3 percent had a balance at the time of the interview; in 2004, 74.9 percent had cards, and 58.0 percent of these families had an outstanding balance on them.
- 17 percent of American households owe more than they own.
The abrogation of usury laws and over-extension of debt has been implicated in the present credit card problem.
- Nilson Report, April 2009
- U.S. Congress' Joint Economic Committee, Vicious Cycle: How Unfair Credit Card Company Practices Are Squeezing Consumers and Undermining the Recovery, May 2009
- Sallie Mae, How Undergraduate Students Use Credit Cards, April 2009
- Generation Broke: Growth of Debt Among Young Americans
- Federal Reserve Survey of Consumer Finances, February 2009
- Mishel, Bernstein, Allegretto, 2007. p. 257
- Time Inc. How Americans Got Into a Credit Card Mess, Aug. 08, 2009