CHARGE CARDS

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CHARGE CARDS

Published by sam - 12/09/07 - 10:09:19 am

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In this series we will start talking about charge card and how you can use it to manage your money effectively.

Although advertisements try to convey the impression that a charge card will enhance your social status and give you access to glamorous and exotic restaurants and resorts, the fact is that it is hardly an admission ticket to membership in the elite class. American carry more than 500 million charge cards in their wallet (with more than $104 billion owed on them), and the annual income requirements for the most widely used cards may run as low as $5,000. Stripped of their glamour, the advertisements for charge cards are really selling credit – in a sometimes insidious and most expensive form. Far from constituting an elite group, many card holders are severely pressed to meet either the minimum payments on their monthly credit card statements or the entire balance due on their charge bill.

In addition to credit, however, a charge card offers you convenience—at relatively low cost if, like some 50 percent of all card holders, you pay your monthly bill in full. Whether they pay these bills in full or use their cards as a source of credit, all cardholders can enjoy this convenience, but it comes at a price –often an exorbitant price for the credit users.

Many cards also offer extras—discounts at some retailers extended warranties on items purchased with the card, and car insurance. Those add-ons are largely marketing gimmicks designed to distract attention from the important dollars and cents elements of every charge card: interest rates, fees, retailers acceptance, and terms and conditions of the credit card agreement.

TYPES OF CARDS

There are several types of charge cards and significant differences within each type. Strictly speaking, a credit card offers its holders a line of credit and makes provision for monthly payments of principal and interest unless the balance is paid within a set grace period. A travel and entertainment (T & E) card, by contrast, offers a grace period but requires full repayment before the grace period expires; interest is charged on late payments. With a credit card, you may pay part of your bill plus interest several months; with a T & E card, you must pay your entire bill by the end of the month (or whatever the grace period is) or incur the interest charges. Issuers of credit cards make money on the interest charges, issuers of T & E cards make money from the annual membership fees they impose. The distinctions between credit and T & E cards are becoming increasingly blurred, and they function identically with respect to purchases; though the latter are less widely accepted by retailers than the former.

Bank Credit Cards

Although, Master card and Visa are widely recognized as brand names, neither organization issues credit cards. Instead, they provide advertising, credit-authorization systems, and some record keeping services for member banks, which actually issue the cards. Because these banks can, within broad limits, establish whatever charges and terms they wish, the widespread notion that all credit cards are alike is clearly unfounded. MasterCard and Visa are alike however, in that both are widely accepted in the United States and abroad. Hence, a choice between them should be governed by the terms offered by individual completing banks.

Both MasterCard and Visa produce income for the issuing banks from three sources: the annual fee, the interest paid card holders, and the commissions they charge merchants for converting their credit card charge slips into cash. When these cards were first issued, no annual fee was imposed, and cardholders who paid their monthly statements in full were charged nothing for the service. Subsequently, most banks, pleading high administrative costs imposed an annual fee; few banks did not, but these may charge a higher interest rate for installment payments.

Interest rates also vary from one bank to another, but virtually all are significantly higher than the rates the banks charge for personal loans. Although a few states impose a ceiling on the rates bank can charge, many banks evade the limit by moving their credit card operations to a less restrictive state.

As the prime rate dropped to more than 10 percentage points below the average credit card rate of 18.8 percent in the mid-1980’s several attempts were made to establish federal regulations limiting credit card rates. At the time of this writing, however, no such federal legislation has been successful. The banks claim those administrative costs and a high interest charges. Those who would regulate the rate argue that the default rate (as well as consumer financial difficulties) could be sharply reduced if the banks were to issue cards less indiscriminately. The threat of regulation did not produce a general or precipitous drop in the rates, but in 1987 it did set off a small flurry of rate competition that produced rates as low as 11.5 percent.

Another credit card—issued only by a single bank—is somewhat different from MasterCard and Visa. The Discover card, offered by the Greenwood Trust Company of Wilmington, Delaware ( a subsidiary of the Sears financial network) charges no annual fee and also offers the cardholder a small annual rebate based on the total amount charged. These tiny rebates may be attractive to cardholder who charge large amounts annually and pay their monthly balances in full, but interest rate on this card is very high, and its acceptance is not nearly as widespread as for MasterCard and Visa. Moreover, Greenwood Trust has indicated that it plans to impose an annual fee as soon as the discover card membership and the acceptance reach higher levels.

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September 12, 2007 | Charge Cards, Banking |

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