A Credit Card Sysytem is a type of retail transaction
settlement and credit system, named after the small plastic
card issued to users of the system. A credit card is different
from a debit card in that the credit card issuer loans the
consumer money rather than having the money removed from an
account. All credit cards are the same shape and size, as
specified by the ISO 7810 standard.
A credit card user is issued with the card after approval
from a provider (often a bank, but sometimes a specialised
credit card provider such as American Express or Diners' Club),
in which they will be able to make purchases from merchants
supporting that credit card up to a prenegotiated credit limit.
When a purchase is made, the credit card user indicates their
consent to pay, usually by signing a receipt with a record
of the card details and indicating the amount to be paid.
More recently, electronic verification systems have allowed
merchants (using a strip of magnetized material on the card
holding information in a similar manner to magnetic tape or
a floppy disk) to verify that the card is valid and the credit
card customer has sufficient credit to cover the purchase
in a few seconds, allowing the verification to happen at time
of purchase. Some services can be paid for over the telephone
by credit card merely by quoting the number embossed onto
the card (the credit card number), and they can be used in
a similar manner to pay for purchases from online vendors.
Each month, the credit card user is sent a statement indicating
the purchases undertaken with the card, and the total amount
owing. The cardholder must then pay a minimum proportion of
the bill by a due date, and may choose to pay more or indeed
pay the entire amount owing. The credit provider charges interest
on the amount owing (typically, a fairly high rate much higher
than most other forms of debt). Typically, a credit card issuers
will waive interest charges if the balance is paid in full
each month, which allows the credit card to serve as a form
of revolving credit.
As well as profits through interest, card companies charge
merchants fees for money transfer. When the companies formally
or informally prevent these fees from being passed on to credit
card users but instead require them to be spread among all
customers, this raises the possibility of a harmful market
imperfection through the mechanism of the Tragedy of the commons.
Australia is currently acting to reduce this by allowing merchants
to apply surcharges for credit card users. Credit card companies
generally do provide a guarantee the merchant will be paid
on legitimate transactions regardless of whether the consumer
pays their credit card bill. However, credit card companies
generally will not pay a merchant if the consumer challenges
the legitimacy of the transaction and will fine merchants
who have a large number of chargebacks.
The credit card was the successor of a variety of merchant
credit schemes. The concept of paying merchants using a card
was invented in 1950 with Diners Club invention of the charge
card, which is similar but required the entire bill to be
paid with each statement. Credit card service was first offered
As well as convenient, accessible credit, the cards offered
consumers an easy way to track expenses, which is necessary
both for monitoring personal expenditure and the tracking
of work-related expenses for taxation and reimbursement purposes.
They have now spread worldwide, and are offered in a huge
variety of permutations with differing credit limits, repayment
arrangements (some cards offer interest-free periods, while
others do not but compensate with much lower interest rates),
and other perks (such as rewards schemes in which points "earned"
for purchasing goods with the card can be reclaimed for further
goods and services). In addition, some countries such as the
United States limit the amount that a consumer can be held
liable for fraudulent transactions which shifts the liability
to the merchant. This encourages the use of credit cards for
electronic and mail order transactions. They have spread far
and wide beyond their initial market of the wealthy businessman
and are now ubiquitous amongst the middle class of most Western
The relatively low security of the credit card system presents
many opportunities for fraud. However, this does not imply
that the system is broken. The goal of the credit card companies
is not to eliminate fraud, it is to reduce it to manageable
levels, such that the total cost of both fraud and fraud prevention
is minimised. This implies that high-cost low-return fraud
prevention measures will not be used if their cost exceeds
the potential gains from fraud reduction. This opportunity
for fraud has created a black market in stolen credit card
numbers, which must generally be used quickly before the card
is reported stolen.