Credit card - Wikipedia

A credit card is a payment card issued to users (cardholders) as a method of payment. It allows the cardholder to pay for goods and services based on the holder's promise to pay for them.^[1] The issuer of the card (usually a bank) creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance.

A credit card is different from a charge card, where it requires the balance to be repaid in full each month.^[2] In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. A credit card also differs from a cash card, which can be used like currency by the owner of the card. A credit card differs from a charge card also in that a credit card typically involves a third-party entity that pays the seller and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date.

Technical specifications[edit]

The size of most credit cards is 85.60 mm × 53.98 mm (3.370 in × 2.125 in) and rounded corners with a radius of 2.88–3.48 mm,^[3] conforming to the ISO/IEC 7810 ID-1 standard, the same size as ATM cards and other payment cards, such as debit cards.

Credit cards have a printed^[4] or embossed bank card number complying with the ISO/IEC 7812 numbering standard. The card number's prefix, called the Bank Identification Number, is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs. This is the first six digits for MasterCard and Visa cards. The next nine digits are the individual account number, and the final digit is a validity check code.

Both of these standards are maintained and further developed by ISO/IEC JTC 1/SC 17/WG 1. Credit cards have a magnetic stripe conforming to the ISO/IEC 7813. Many modern credit cards have a computer chip embedded in them as a security feature.

In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and security codes. Not all credit cards have the same sets of extra codes nor do they use the same number of digits.

History[edit]

Early charge cards[edit]

Early general purpose charge cards: Diners Club, Carte Blanche, and American Express

The concept of customers paying different merchants using the same card was expanded in 1950 by Ralph Schneider and Frank McNamara, founders of Diners Club, to consolidate multiple cards. The Diners Club, which was created partially through a merger with Dine and Sign, produced the first "general purpose" charge card and required the entire bill to be paid with each statement. That was followed by Carte Blanche and in 1958 by American Express which created a worldwide credit card network (although these were initially charge cards that later acquired credit card features).

Interest charges[edit]

Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.

For example, if a user had a $1,000 transaction and repaid it in full within this grace period, there would be no interest charged. If, however, even $1.00 of the total amount remained unpaid, interest would be charged on the $1,000 from the date of purchase until the payment is received.

The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account.

Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as a residual retail finance charge (RRFC). Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the balance stopped revolving).

The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue.

Grace period - interest free period

A credit card's grace period is the time the cardholder has to pay the balance before interest is assessed on the outstanding balance. Grace periods may vary, but usually range from 20 to 55 days depending on the type of credit card and the issuing bank. Some policies allow for reinstatement after certain conditions are met.

Usually, if a cardholder is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance; with most credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement (i.e. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.

Parties involved[edit]

Cardholder: The holder of the card used to make a purchase; the consumer.
Card-issuing bank: The financial institution or other organization that issued the credit card to the cardholder. This bank bills the consumer for repayment and bears the risk that the card is used fraudulently. American Express and Discover were previously the only card-issuing banks for their respective brands, but as of 2007, this is no longer the case. Cards issued by banks to cardholders in a different country are known as offshore credit cards.
Merchant: The individual or business accepting credit card payments for products or services sold to the cardholder.
Acquiring bank: The financial institution accepting payment for the products or services on behalf of the merchant.
Independent sales organization: Resellers (to merchants) of the services of the acquiring bank.
Merchant account: This could refer to the acquiring bank or the independent sales organization, but in general is the organization that the merchant deals with.
Credit Card association: An association of card-issuing banks such as Discover, Visa, MasterCard, American Express, etc. that set transaction terms for merchants, card-issuing banks, and acquiring banks.
Transaction network: The system that implements the mechanics of the electronic transactions. May be operated by an independent company, and one company may operate multiple networks.
Affinity partner: Some institutions lend their names to an issuer to attract customers that have a strong relationship with that institution, and get paid a fee or a percentage of the balance for each card issued using their name. Examples of typical affinity partners are sports teams, universities, charities, professional organizations, and major retailers.
Insurance providers: Insurers underwriting various insurance protections offered as credit card perks, for example, Car Rental Insurance, Purchase Security, Hotel Burglary Insurance, Travel Medical Protection etc.

The flow of information and money between these parties — always through the card associations — is known as the interchange, and it consists of a few steps.

Transaction steps[edit]

Authorization: The cardholder presents the card as payment to the merchant and the merchant submits the transaction to the acquirer (acquiring bank). The acquirer verifies the credit card number, the transaction type and the amount with the issuer (card-issuing bank) and reserves that amount of the cardholder's credit limit for the merchant. An authorization will generate an approval code, which the merchant stores with the transaction.
Batching: Authorized transactions are stored in "batches", which are sent to the acquirer. Batches are typically submitted once per day at the end of the business day. If a transaction is not submitted in the batch, the authorization will stay valid for a period determined by the issuer, after which the held amount will be returned to the cardholder's available credit (see authorization hold). Some transactions may be submitted in the batch without prior authorizations; these are either transactions falling under the merchant's floor limit or ones where the authorization was unsuccessful but the merchant still attempts to force the transaction through. (Such may be the case when the cardholder is not present but owes the merchant additional money, such as extending a hotel stay or car rental.)
Clearing and Settlement: The acquirer sends the batch transactions through the credit card association, which debits the issuers for payment and credits the acquirer. Essentially, the issuer pays the acquirer for the transaction.
Funding: Once the acquirer has been paid, the acquirer pays the merchant. The merchant receives the amount totaling the funds in the batch minus either the "discount rate", "mid-qualified rate", or "non-qualified rate" which are tiers of fees the merchant pays the acquirer for processing the transactions.
Chargebacks: A chargeback is an event in which money in a merchant account is held due to a dispute relating to the transaction. Chargebacks are typically initiated by the cardholder. In the event of a chargeback, the issuer returns the transaction to the acquirer for resolution. The acquirer then forwards the chargeback to the merchant, who must either accept the chargeback or contest it.

Credit card register[edit]

A credit card register is a transaction register used to ensure the increasing balance owed from using a credit card is enough below the credit limit to deal with authorization holds and payments not yet received by the bank and to easily look up past transactions for reconciliation and budgeting.

The register is a personal record of banking transactions used for credit card purchases as they affect funds in the bank account or the available credit. In addition to check number and so forth the code column indicates the credit card. The balance column shows available funds after purchases. When the credit card payment is made the balance already reflects the funds were spent. In a credit card's entry, the deposit column shows the available credit and the payment column shows total owed, their sum being equal to the credit limit.

Each check written, debit card transaction, cash withdrawal, and credit card charge is entered manually into the paper register daily or several times per week.^[15] Credit card register also refers to one transaction record for each credit card. In this case the booklets readily enable the location of a card’s current available credit when ten or more cards are in use.^{[citation
needed]}

Benefits and drawbacks[edit]

Benefits to cardholder[edit]

The main benefit to the cardholder is convenience. Compared to debit cards and checks, a credit card allows small short-term loans to be quickly made to a cardholder who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card.

Different countries offer different levels of protection. In the UK, for example, the bank is jointly liable with the merchant for purchases of defective products over £100.^[22]

Many credit cards offer rewards and benefits packages, such as enhanced product warranties at no cost, free loss/damage coverage on new purchases, various insurance protections, for example, rental car insurance, common carrier accident protection, and travel medical insurance.

Credit cards can also offer a loyalty program, where each purchase is rewarded with points, which may be redeemed for cash or products. Research has examined whether competition among card networks may potentially make payment rewards too generous, causing higher prices among merchants, thus actually impacting social welfare and its distribution, a situation potentially warranting public policy interventions.^[23]

Currently, there are credit cards a 0% intro APR on Balance Transfers and no late fees.^[24]

Comparison of credit card benefits in the US[edit]

The table below contains a list of benefits offered in the United States for consumer credit cards. Benefits may vary in other countries or business credit cards.

	MasterCard^[25]	Visa^[26]	American Express^[27]	Discover^[28]
Return Extension	60 days up to $250	90 days up to $250^[29]	90 days up to $300	90 days up to $500^[30]
Extended Warranty	2x Original up to 1 year	depends	1 Additional Year 6 years max	1 Additional Year 4 years max^[31]
Price Protection	60 days	Varies		90 days up to $500^[32]
Loss/Damage Coverage	90 days	depends	90 days up to $1,000	90 days up to $500^[33]
Rental Car Insurance Main article: Damage waiver	15 days: Collision, theft, vandalism	15 days: Collision, theft	30 days: Collision, theft, vandalism^[34]	31 days: Collision^[35]

Detriments to cardholders[edit]

High interest and bankruptcy[edit]

Low introductory credit card rates are limited to a fixed term, usually between 6 and 12 months, after which a higher rate is charged. As all credit cards charge fees and interest, some customers become so indebted to their credit card provider that they are driven to bankruptcy. Some credit cards often levy a rate of 20 to 30 percent after a payment is missed.^[36] In other cases, a fixed charge is levied without change to the interest rate. In some cases universal default may apply: the high default rate is applied to a card in good standing by missing a payment on an unrelated account from the same provider. This can lead to a snowball effect in which the consumer is drowned by unexpectedly high interest rates. Further, most card holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit. First Premier Bank at one point offered a credit card with a 79.9% interest rate;^[37] however, they discontinued this card in February 2011 because of persistent defaults.^[38]

Complex fee structures in the credit card industry limit customers' ability to comparison shop, help ensure that the industry is not price-competitive and help maximize industry profits.^[39]

Research shows that a substantial fraction of consumers (about 40 percent) choose a sub-optimal credit card agreement, with some incurring hundreds of dollars of avoidable interest costs.^[40]

Weakens self regulation[edit]

Several studies have shown that consumers are likely to spend more money when they pay by credit card. Researchers suggest that when people pay using credit cards, they do not experience the abstract pain of payment.^[41]Furthermore, researchers have found that using credit cards can increase consumption of unhealthy food.^[42]

Detriments to society[edit]

Inflated pricing for all consumers[edit]

Merchants that accept credit cards must pay interchange fees and discount fees on all credit-card transactions.^[43]^[44] In some cases merchants are barred by their credit agreements from passing these fees directly to credit card customers, or from setting a minimum transaction amount (no longer prohibited in the United States, United Kingdom or Australia).^[45] The result is that merchants are induced to charge all customers (including those who do not use credit cards) higher prices to cover the fees on credit card transactions.^[44] The inducement can be strong because the merchant's fee is a percentage of the sale price, which has a disproportionate effect on the profitability of businesses that have predominantly credit card transactions, unless compensated for by raising prices generally. In the United States in 2008 credit card companies collected a total of $48 billion in interchange fees, or an average of $427 per family, with an average fee rate of about 2% per transaction.^[44]

Benefits to merchants[edit]

An example of street markets accepting credit cards. Most simply display the acceptance marks (stylized logos, shown in the upper-left corner of the sign) of all the cards they accept.

For merchants, a credit card transaction is often more secure than other forms of payment, such as cheques, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment (except for legitimate disputes, which are discussed below, and can result in charges back to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises. Finally, credit cards reduce the back office expense of processing checks/cash and transporting them to the bank.

Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk. Credit cards can also aid in securing a sale, especially if the customer does not have enough cash on his or her person or checking account. Extra turnover is generated by the fact that the customer can purchase goods and/or services immediately and is less inhibited by the amount of cash in his or her pocket and the immediate state of his or her bank balance. Much of merchants' marketing is based on this immediacy.

For each purchase, the bank charges the merchant a commission (discount fee) for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee (interchange rate).

Costs to merchants[edit]

Merchants are charged several fees for accepting credit cards. The merchant is usually charged a commission of around 1 to 4 percent of the value of each transaction paid for by credit card.^[46] The merchant may also pay a variable charge, called a merchant discount rate, for each transaction.^[43] In some instances of very low-value transactions, use of credit cards will significantly reduce the profit margin or cause the merchant to lose money on the transaction. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. In some cases merchants may charge users a "credit card supplement" (or surcharge), either a fixed amount or a percentage, for payment by credit card.^[47] This practice was prohibited by most credit card contracts in the United States until 2013, when a major settlement between merchants and credit card companies allowed merchants to levy surcharges. Most retailers have not started using credit card surcharges, however, for fear of losing customers.^[48] Surcharging is actually illegal in 10 states.^[46]

Merchants in the United States have been fighting what they consider to be unfairly high fees charged by credit card companies in a series of lawsuits that started in 2005. Merchants charged that the two main credit card processing companies, MasterCard and Visa, used their monopoly power to levy excessive fees in a class-action lawsuit involving the National Retail Federation and major retailers such as Wal-Mart. In December 2013, a federal judge approved a $5.7 billion settlement in the case that offered payouts to merchants who had paid credit card fees, the largest antitrust settlement in U.S. history. Some large retailers, such as Wal-Mart and Amazon, chose to not participate in this settlement, however, and have continued their legal fight against the credit card companies.^[48]

Merchants are also required to lease or purchase processing equipment, in some cases this equipment is provided free of charge by the processor. Merchants must also satisfy data security compliance standards which are highly technical and complicated. In many cases, there is a delay of several days before funds are deposited into a merchant's bank account. Because credit card fee structures are very complicated, smaller merchants are at a disadvantage to analyze and predict fees.

Finally, merchants assume the risk of chargebacks by consumers.

Security[edit]

Main article: Credit card fraud

Costs[edit]

Credit card issuers (banks) have several types of costs:

Interest expenses

Banks generally borrow the money they then lend to their customers. As they receive very low-interest loans from other firms, they may borrow as much as their customers require, while lending their capital to other borrowers at higher rates. If the card issuer charges 15% on money lent to users, and it costs 5% to borrow the money to lend, and the balance sits with the cardholder for a year, the issuer earns 10% on the loan. This 10% difference is the "net interest spread" and the 5% is the "interest expense".

Operating costs

This is the cost of running the credit card portfolio, including everything from paying the executives who run the company to printing the plastics, to mailing the statements, to running the computers that keep track of every cardholder's balance, to taking the many phone calls which cardholders place to their issuer, to protecting the customers from fraud rings. Depending on the issuer, marketing programs are also a significant portion of expenses.

Charge offs

When a cardholder becomes severely delinquent on a debt (often at the point of six months without payment), the creditor may declare the debt to be a charge-off. It will then be listed as such on the debtor's credit bureau reports. (Equifax, for instance, lists "R9" in the "status" column to denote a charge-off.)

A charge-off is considered to be "written off as uncollectable". To banks, bad debts and fraud are part of the cost of doing business.

However, the debt is still legally valid, and the creditor can attempt to collect the full amount for the time periods permitted under state law, which is usually three to seven years. This includes contacts from internal collections staff, or more likely, an outside collection agency. If the amount is large (generally over $1,500–2,000), there is the possibility of a lawsuit or arbitration.

Rewards

Many credit card customers receive rewards, such as frequent flyer points, gift certificates, or cash back as an incentive to use the card. Rewards are generally tied to purchasing an item or service on the card, which may or may not include balance transfers, cash advances, or other special uses. Depending on the type of card, rewards will generally cost the issuer between 0.25% and 2.0% of the spread. Networks such as Visa or MasterCard have increased their fees to allow issuers to fund their rewards system. Some issuers discourage redemption by forcing the cardholder to call customer service for rewards. On their servicing website, redeeming awards is usually a feature that is very well hidden by the issuers.^{[citation
needed]} With a fractured and competitive environment, rewards points cut dramatically into an issuer's bottom line, and rewards points and related incentives must be carefully managed to ensure a profitable portfolio. Unlike unused gift cards, in whose case the breakage in certain US states goes to the state's treasury, unredeemed credit card points are retained by the issuer.

Fraud

In relative numbers the values lost in bank card fraud are minor, calculated in 2006 at 7 cents per 100 dollars worth of transactions (7 basis points).^[55] In 2004, in the UK, the cost of fraud was over £500 million.^[56] When a card is stolen, or an unauthorized duplicate made, most card issuers will refund some or all of the charges that the customer has received for things they did not buy. These refunds will, in some cases, be at the expense of the merchant, especially in mail order cases where the merchant cannot claim sight of the card. In several countries, merchants will lose the money if no ID card was asked for, therefore merchants usually require ID card in these countries. Credit card companies generally guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays their credit card bill. Most banking services have their own credit card services that handle fraud cases and monitor for any possible attempt at fraud. Employees that are specialized in doing fraud monitoring and investigation are often placed in Risk Management, Fraud and Authorization, or Cards and Unsecured Business. Fraud monitoring emphasizes minimizing fraud losses while making an attempt to track down those responsible and contain the situation. Credit card fraud is a major white collar crime that has been around for many decades, even with the advent of the chip based card (EMV) that was put into practice in some countries to prevent cases such as these. Even with the implementation of such measures, credit card fraud continues to be a problem.

Revenues[edit]

Offsetting the costs are the following revenues:

Interchange fee[edit]

Main article: Interchange fee

In addition to fees paid by the card holder, merchants must also pay interchange fees to the card-issuing bank and the card association.^[57]^[58] For a typical credit card issuer, interchange fee revenues may represent about a quarter of total revenues.^[59]

These fees are typically from 1 to 6 percent of each sale, but will vary not only from merchant to merchant (large merchants can negotiate lower rates^[59]), but also from card to card, with business cards and rewards cards generally costing the merchants more to process. The interchange fee that applies to a particular transaction is also affected by many other variables including: the type of merchant, the merchant's total card sales volume, the merchant's average transaction amount, whether the cards were physically present, how the information required for the transaction was received, the specific type of card, when the transaction was settled, and the authorized and settled transaction amounts. In some cases, merchants add a surcharge to the credit cards to cover the interchange fee, encouraging their customers to instead use cash, debit cards, or even cheques.

Interest on outstanding balances[edit]

Interest charges vary widely from card issuer to card issuer. Often, there are "teaser" rates in effect for initial periods of time (as low as zero percent for, say, six months), whereas regular rates can be as high as 40 percent. In the U.S. there is no federal limit on the interest or late fees credit card issuers can charge; the interest rates are set by the states, with some states such as South Dakota, having no ceiling on interest rates and fees, inviting some banks to establish their credit card operations there. Other states, for example Delaware, have very weak usury laws. The teaser rate no longer applies if the customer does not pay their bills on time, and is replaced by a penalty interest rate (for example, 23.99%) that applies retroactively.

Fees charged to customers

The major fees are for:

Late or overdue payments
Charges that result in exceeding the credit limit on the card (whether deliberately or by mistake), called overlimit fees
Cash advances and convenience cheques (often 3% of the amount)
Transactions in a foreign currency (as much as 3% of the amount). A few financial institutions do not charge a fee for this.
Membership fees (annual or monthly), sometimes a percentage of the credit limit.
Exchange rate loading fees (sometimes these might not be reported on the customer's statement, even when applied).^[60] The variation of exchange rates applied by different credit cards can be very substantial, as much as 10% according to a Lonely Planet report in 2009.^[61]

In the U.S., the Credit CARD Act of 2009 specifies that credit card companies must send cardholders a notice 45 days before they can increase or change certain fees. This includes annual fees, cash advance fees, and late fees.^[62]

Over limit charges[edit]

Consumers who keep their account in good order by always staying within their credit limit, and always making at least the minimum monthly payment will see interest as the biggest expense from their card provider. Those who are not so careful and regularly surpass their credit limit or are late in making payments are exposed to multiple charges that were typically as high as £25–35^[63] until a ruling from the Office of Fair Trading^[64] that they would presume charges over £12 to be unfair which led the majority of card providers to reduce their fees to £12.

United States[edit]

The Credit CARD Act of 2009 requires that consumers "opt-in" to over-limit charges. Some card issuers have therefore commenced solicitations requesting customers to opt into overlimit fees, presenting this as a benefit as it may avoid the possibility of a future transaction being declined. Other issuers have simply discontinued the practice of charging overlimit fees. Whether a customer opts into the overlimit fee or not, banks will in practice have discretion as to whether they choose to authorize transactions above the credit limit or not. Of course, any approved over limit transactions will only result in an overlimit fee for those customers who have opted into the fee. This legislation took effect on 22 February 2010. Following this Act, the companies are now required by law to show on a customer's bills how long it would take them to pay off the balance.

United Kingdom[edit]

The higher fees originally charged were claimed to be designed to recoup the card operator's overall business costs and to try to ensure that the credit card business as a whole generated a profit, rather than simply recovering the cost to the provider of the limit breach, which has been estimated as typically between £3–£4. Profiting from a customer's mistakes is arguably not permitted under UK common law, if the charges constitute penalties for breach of contract, or under the Unfair Terms in Consumer Contracts Regulations 1999.

Subsequent rulings in respect of personal current accounts suggest that the argument that these charges are penalties for breach of contract is weak, and given the Office of Fair Trading's ruling it seems unlikely that any further test case will take place.

Whilst the law remains in the balance, many consumers have made claims against their credit card providers for the charges that they have incurred, plus interest that they would have earned had the money not been deducted from their account. It is likely that claims for amounts charged in excess of £12 will succeed, but claims for charges at the OFT's £12 threshold level are more contentious.

Neutral consumer resources[edit]

Canada[edit]

The Government of Canada maintains a database of the fees, features, interest rates and reward programs of nearly 200 credit cards available in Canada. This database is updated on a quarterly basis with information supplied by the credit card issuing companies. Information in the database is published every quarter on the website of the Financial Consumer Agency of Canada (FCAC).

Information in the database is published in two formats. It is available in PDF comparison tables that break down the information according to type of credit card, allowing the reader to compare the features of, for example, all the student credit cards in the database.

The database also feeds into an interactive tool on the FCAC website.^[65] The interactive tool uses several interview-type questions to build a profile of the user's credit card usage habits and needs, eliminating unsuitable choices based on the profile, so that the user is presented with a small number of credit cards and the ability to carry out detailed comparisons of features, reward programs, interest rates, etc.

Controversy[edit]

Credit card debt has increased steadily. Since the late 1990s, lawmakers, consumer advocacy groups, college officials and other higher education affiliates have become increasingly concerned about the rising use of credit cards among college students. The major credit card companies have been accused of targeting a younger audience, especially college students, many of whom are already in debt with college tuition fees and college loans and who typically are less experienced at managing their own finances. Credit card debt may also negatively affect their grades as they are likely to work more both part and full-time positions.^{[citation
needed]}

Another controversial area is the universal default feature of many North American credit card contracts. When a cardholder is late paying a particular credit card issuer, that card's interest rate can be raised, often considerably. With universal default, a customer's other credit cards, for which the customer may be current on payments, may also have their rates and/or credit limit changed. The universal default feature allows creditors to periodically check cardholders' credit portfolios to view trade, allowing these other institutions to decrease the credit limit and/or increase rates on cardholders who may be late with another credit card issuer. Being late on one credit card will potentially affect all the cardholder's credit cards. Citibank voluntarily stopped this practice in March 2007 and Chase stopped the practice in November 2007.^[66]

The fact that credit card companies can change the interest rate on debts that were incurred when a different rate of interest was in place is similar to adjustable rate mortgages where interest rates on current debt may rise. However, in both cases, this is agreed to in advance, and is a trade off that allows a lower initial rate as well as the possibility of an even lower rate (mortgages, if interest rates fall) or perpetually keeping a below-market rate (credit cards, if the user makes their debt payments on time). The universal default practice was encouraged by federal regulators, particularly those at the Office of the Comptroller of the Currency (OCC), as a means of managing the changing risk profiles of cardholders.^{[citation
needed]}

Another controversial area is the trailing interest issue. Trailing interest is the practice of charging interest on the entire bill no matter what percentage of it is paid. US Senator Carl Levin raised the issue of millions of Americans affected by hidden fees, compounding interest and cryptic terms. Their woes were heard in a Senate Permanent Subcommittee on Investigations hearing which was chaired by Senator Levin, who said that he intends to keep the spotlight on credit card companies and that legislative action may be necessary to purge the industry.^[67] In 2009, the C.A.R.D. Act was signed into law, enacting protections for many of the issues Levin had raised.

In the United States, some have called for Congress to enact additional regulations on the industry to expand the disclosure box clearly disclosing rate hikes, use plain language, incorporate balance payoff disclosures, and also to outlaw universal default. At a congress hearing around 1 March 2007, Citibank announced it would no longer practice this, effective immediately. Opponents of such regulation argue that customers must become more proactive and self-responsible in evaluating and negotiating terms with credit providers. Some of the nation's influential top credit card issuers, which are among the top fifty corporate contributors to political campaigns, successfully opposed it.^{[citation
needed]}

Hidden costs[edit]

In the United Kingdom, merchants won the right through The Credit Cards (Price Discrimination) Order 1990^[68] to charge customers different prices according to the payment method. As of 2007, the United Kingdom was one of the world's most credit card-intensive countries, with 2.4 credit cards per consumer, according to the UK Payments Administration Ltd.^[69]

In the United States until 1984, federal law prohibited surcharges on card transactions. Although the federal Truth in Lending Act provisions that prohibited surcharges expired that year, a number of states have since enacted laws that continue to outlaw the practice; California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Maine, New York, Oklahoma, and Texas have laws against surcharges. As of 2006, the United States probably had one of the world's highest if not the top ratio of credit cards per capita, with 984 million bank-issued Visa and MasterCard credit card and debit card accounts alone for an adult population of roughly 220 million people.^[70] The credit card per US capita ratio was nearly 4:1 as of 2003^[71] and as high as 5:1 as of 2006.^[72]

Credit cards in ATMs[edit]

Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the card, but many card issuers charge interest on cash advances before they do so on purchases. The interest on cash advances is commonly charged from the date the withdrawal is made, rather than the monthly billing date. Many card issuers levy a commission for cash withdrawals, even if the ATM belongs to the same bank as the card issuer. Merchants do not offer cashback on credit card transactions because they would pay a percentage commission of the additional cash amount to their bank or merchant services provider, thereby making it uneconomical. Discover is a notable exception to the above. A customer with a Discover card may get up to $50 cash back if the merchant allows it. This amount is simply added to the card holder's cost of the transaction and no extra fees are charged as the transaction is not considered a cash advance.

Many credit card companies will also, when applying payments to a card, do so, for the matter at hand, at the end of a billing cycle, and apply those payments to everything before cash advances. For this reason, many consumers have large cash balances, which have no grace period and incur interest at a rate that is (usually) higher than the purchase rate, and will carry those balances for years, even if they pay off their statement balance each month.