High Interest and Bankruptcy
Credit cards with low introductory rates are limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. As all credit cards assess fees and interest, some customers become so encumbered with their credit debt service that they are driven to bankruptcy. Credit cards will often stipulate a default rate of 20 to 30 percent in the event a payment is missed. That is, if a consumer misses a payment, the rate will automatically increase to a very burdensome level. The practice of universal default, in which the default rate is applied to a card in good standing merely by missing a payment on an unrelated account, greatly magnifies this harm. 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.
Inflated Pricing for All Consumers
Merchants that accept credit cards must pay interchange fees and discount fees on all credit-card transactions.[3][4] However, merchants are usually barred by their credit agreements from passing these fees directly to the credit card customers, or from setting a minimum transaction amount.[5] The result, at least in the United States, is that even consumers that do not use credit cards experience higher prices from most merchants to cover the hidden transaction fees afforded for credit cards.[4] 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.[4] Since these fees can't be passed directly to credit card customers, they become a hidden part of the prices offered by any merchant to all of its customers.
Grace period
A credit card's grace period is the time the customer has to pay the balance before interest is assessed on the outstanding balance. Grace periods vary, but usually range from 20 to 50 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 customer 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.
Benefits to merchants
An example of street markets accepting credit cards. Most simply display the 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 checks, 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.
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.
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). In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount to compensate for the transaction costs.
In some countries, for example the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card's PIN for identification, and in that case showing an ID card is not necessary.
Costs to merchants
Merchants are charged many fees for the privilege of accepting credit cards. The merchant may be charged a discount rate of 1%-3%+ of each transaction obtained through a credit card. Usually, the merchant will also pay a variable charge, called an interchange rate, for each transaction.[3] Thus in some instances of very low value transactions, use of credit cards may actually cause the merchant to lose money on the transaction. Merchants must accept these transactions as part of their costs to retain the privilege of accepting credit card transactions. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. But rates are often reduced in an attempt to include more of these types of merchants.
In certain countries, merchants are required to pay the acquiring banks a monthly terminal rental fee[citation needed], if the terminals are provided by the acquiring banks. However larger merchants can apply to the acquiring banks for waivers of the fees which the acquiring banks usually obliged. Smaller merchants may not been able to get waivers from the acquiring banks and have to absorb the terminal rental fees as part of their cost of accepting credit cards.
Credit cards with low introductory rates are limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. As all credit cards assess fees and interest, some customers become so encumbered with their credit debt service that they are driven to bankruptcy. Credit cards will often stipulate a default rate of 20 to 30 percent in the event a payment is missed. That is, if a consumer misses a payment, the rate will automatically increase to a very burdensome level. The practice of universal default, in which the default rate is applied to a card in good standing merely by missing a payment on an unrelated account, greatly magnifies this harm. 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.
Inflated Pricing for All Consumers
Merchants that accept credit cards must pay interchange fees and discount fees on all credit-card transactions.[3][4] However, merchants are usually barred by their credit agreements from passing these fees directly to the credit card customers, or from setting a minimum transaction amount.[5] The result, at least in the United States, is that even consumers that do not use credit cards experience higher prices from most merchants to cover the hidden transaction fees afforded for credit cards.[4] 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.[4] Since these fees can't be passed directly to credit card customers, they become a hidden part of the prices offered by any merchant to all of its customers.
Grace period
A credit card's grace period is the time the customer has to pay the balance before interest is assessed on the outstanding balance. Grace periods vary, but usually range from 20 to 50 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 customer 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.
Benefits to merchants
An example of street markets accepting credit cards. Most simply display the 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 checks, 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.
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.
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). In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount to compensate for the transaction costs.
In some countries, for example the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card's PIN for identification, and in that case showing an ID card is not necessary.
Costs to merchants
Merchants are charged many fees for the privilege of accepting credit cards. The merchant may be charged a discount rate of 1%-3%+ of each transaction obtained through a credit card. Usually, the merchant will also pay a variable charge, called an interchange rate, for each transaction.[3] Thus in some instances of very low value transactions, use of credit cards may actually cause the merchant to lose money on the transaction. Merchants must accept these transactions as part of their costs to retain the privilege of accepting credit card transactions. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. But rates are often reduced in an attempt to include more of these types of merchants.
In certain countries, merchants are required to pay the acquiring banks a monthly terminal rental fee[citation needed], if the terminals are provided by the acquiring banks. However larger merchants can apply to the acquiring banks for waivers of the fees which the acquiring banks usually obliged. Smaller merchants may not been able to get waivers from the acquiring banks and have to absorb the terminal rental fees as part of their cost of accepting credit cards.
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