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Economy
29 Dec 2019

Credit Card: A smart money

Arun Ranjit
Arun Ranjit
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Call it a love affair with a dark side. Consumers today can’t get enough of their credit cards, slapping them down with passion to pay for everything from fast food to plane tickets at a rate of 10,000 transactions a second worldwide.
However, the functional way of Credit and Debit Card is different.
Credit Card can be used in any transactions without having accounts in the banks. Using credit cards is

like a taking loan from a specific bank whereas to use Debit Card—a person should have his/her accounts with cash balance in the bank.
A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services, based on the cardholder’s promise to the card issuer to pay them for the amounts so paid plus other agreed charges.
The card issuer (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. 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.
Today, among many commercial banks operating in Nepal almost all the commercial banks including Standard Chartered Bank, Nepal Investment Bank, Nabil Bank, Siddhartha Bank, Himalayan Bank, Civil Bank, Global IME Bank, Prabhu Bank etc. have facilitated their customers by issuing Credit Cards.
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, 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 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:
The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. Bellamy used the term credit card eleven times in this novel, although this referred to a card for spending a citizen’s dividend from the government, rather than borrowing.
Western Union began issuing charge cards to its frequent customers in 1921. In 1938, several companies started to accept each other’s cards. In the 1940s, oil companies in the United States used them to sell fuel and other oil based products to a growing number of automobile owners.
The Charga-Plate, developed in 1928, was an early predecessor of the credit card and was used in the U.S. from the 1930s to the late 1950s. It was a 2½” × 1¼” rectangle of sheet metal related to Addressograph and military dog tag systems. It was embossed with the customer’s name, city, and state. It held a small paper card on its back for a signature.
In 1934, American Airlines and the Air Transport Association simplified the process even more with the advent of the Air Travel Card. They created a numbering scheme that identified the issuer of the card as well as the customer account. This is the reason the modern UATP cards still start with the number 1. With an Air Travel Card, passengers could “buy now, and pay later” for a ticket against their credit and receive a fifteen percent discount at any of the accepting airlines.
By the 1940s, all of the major US airlines offered Air Travel Cards that could be used on 17 different airlines. By 1941 about half of the airlines’ revenues came through the Air Travel Card agreement. The airlines had also started offering installment plans to lure new travelers into the air. In October 1948, the Air Travel Card became the first internationally valid charge card within all members of the International Air Transport Association.
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).
Until 1958, no one had been able to successfully establish a revolving credit financial system in which a card issued by a third-party bank was being generally accepted by a large number of merchants, as opposed to merchant-issued revolving cards accepted by only a few merchants. There had been a dozen attempts by small American banks, but none of them were able to last very long. In September 1958, Bank of America launched the BankAmericard in Fresno, California, which would become the first successful recognizably modern credit card. This card succeeded where others failed by breaking the chicken-and-egg cycle in which consumers did not want to use a card that few merchants would accept and merchants did not want to accept a card that few consumers used.
In 1966, Barclaycard in the United Kingdom launched the first credit card outside the United States.
Although credit cards reached very high adoption levels in the US, Canada and the UK during the latter 20th century, many cultures were more cash-oriented or developed alternative forms of cashless payments, such as Carte bleue or the Eurocard (Germany, France, Switzerland, and others).
In Nepal:
In Nepal, looking back to the history, Nabil Bank is a pioneer bank that has first issued Credit Cards in 1993. Then after, Himalayan Bank voyages into the Credit Card utility in 1996 where as Standard Chartered Bank steps into the Credit Card business in 1997.
2004 saw Nepal Investment Bank’s entered into the Credit Card mission activities. However, now almost all the commercial banks that are in operations have stretches their hands of credit card dealing.
However, in rest of the world, a plastic card in the name of Credit and Debit has become a part of daily life activities. The card is only a medium to do transactions in all areas—whether to buy train tickets to paying restaurants bills, or while purchasing various goods from department store to grocery store.
So, it can be said that plastic card is still a love-hate relationship.
May be you are already deep in Credit card debt. Now what? What experts say, you should begin by keeping track of daily expenses for one month. This will reveal where savings exist; it could be meals out, or drinks with friends, or shopping trips, or cell phone charges. Then cut back on the extras and use the savings to pay off the credit card. If you are very deep in credit card debt, experts suggest better to take a lower interest bank loan and paying off the cards. Then cut them up with a pair of scissors.
But while American loves the convenience of plastic, they often hate the Credit Card complaints outstrip all other banks-related grievances filed with federal regulators in recent years.
The avalanche of gripes generally boils down to objections about a half-dozen practices, according to congressional staff and consumers groups. The complaints mostly centre on what consumers see as unfairly high interest rates and penalty fees; confusing policies that constantly change, almost always in the lender’s favour; and near insurmountable hurdles to getting help when a consumer falls into trouble or when makes a billing mistake.
All of the major credit card companies-Chase, Bank of America, Citibank, Discover, Capital One, American Express and HSBC-have engaged in at least one of these practices.
The industry defends its policies as necessary so card issuers can adjust prices to reflect the risk that cardholders might default on their debt. But as policymakers step up scrutiny of the industry, companies are being forced to reexamine long-standing practices.
Banks love to issue credit cards, and why not? With their high interest rates, monthly late-payment charges, and annual fees, credit cards are an easy way for banks to boost their bottom lines.
But for consumers, the challenge is different they must use the credit cards, but avoid all those charges. Be smarter than the banks and everything will be okay.
Benefits To Cardholder:
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.
Credit card security relies on the physical security of the plastic card as well as the privacy of the credit card number. Therefore, whenever a person other than the card owner has access to the card or its number, security is potentially compromised.
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.
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.
Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the card.
Some Tips To Be Remembered:
Economists suggest that “Don’t transfer debts from one card to another”. Some credit card holders transfer balances from card with high interest rates, to cards with low interest rates. This can lead to trouble, because the low interest rates are often introductory, and soon expire. If you continue to charge on the new card, the interest will be the same as on the old card.
They also advice that “Don’t fall into minimum payment trap”. Paying the minimum balance is better than nothing, because it avoids the late fees. But it doesn’t pay off the balance, and it forces you to keep paying a very high interest rate. Try to pay in full every month, and avoid interest charges altogether.
Find a card with no annual fee. As the credit card with no annual fee. As the credit card market get more competitive, and more lucrative, banks are using special offers to lure new customers, such as eliminating the annual fee.
Don’t use retail store charge card unless you can pay the balance in full at the end of the month. Cards issued by department and retail stores often charge a higher interest rate than bank-issued credit cards.
Carry only two credit cards. Pay off the first one every month and keep a second one, with a lower interest rate, for large purchases that you can plan to pay back over time.
Frustrations:
Using the credit card helps lots. It doesn’t need to carry hard cash while traveling around or shopping in the various departmental stores. The credit card holders don’t need to pay in hard cash in shopping or eating in any restaurant if s/he is holding debit or credit cards. Just carrying a card in his pocket could pay the bill.
However, high interest rates, high penalty fess, policies constantly changing and almost no help when in trouble are the frustrations sides of the cards.

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