Credit Cards 101 - What are Credit Cards?

With a credit card you receive a line of credit, also known as a credit limit, the maximum amount of credit you can have at any one time. When at the maximum you cannot make further purchases; you must make a total or partial payment before you can use the card again. You are required to pay at least the minimum monthly balance each month. However, paying only this amount can result in you paying a lot in interest.

A person wishing to apply for credit card would be best advised to do so at a financial institution to which they already have an account, preferably with some money in it. But this is not essential; you can apply to any institution, including large retailers that sponsor a credit card. Many credit cards are sponsored by large corporations like Visa and American Express.

The financial institutions make a profit on credit cards in three ways. They make most of their money by the interest charged from the unpaid balance each month. Sometimes, in return for an interest-free period, they charge an annual fee which can be as high as $114. They also charge merchants a percentage of around 1-2 % of their sales income for the service of the card.

Credit cards are designed with sophisticated anti-fraud security features, which include the card’s account number, its signature panel, and its magnetic stripe. The unique number is the key piece of information required to carry out a purchase, and must be carefully protected at all times. The number is 13 digits long for Visa cards, 15 for American Express, 14 for Diner’s Club and 20 for MasterCard. The billions of combinations of numbers provide a substantial security against fraud.

The cardholder should immediately sign the signature panel on the back of the card. If someone steals the card, and signs it, they can make unauthorised purchases on the card. If your card is lost or stolen, immediately call the 24-hour Lost Card telephone number of your financial institution, and they will cancel the card.

The signature documents the owner’s handwriting, and can be compared at time of purchase to detect fraudulent use. The signature panel is printed with a fingerprint design that is difficult to reproduce. If the signature is erased, the design disappears leaving a white spot, indicating unauthorized use.

The magnetic stripe is an area coated with iron oxide particles, containing binary encoded information which can be used to authenticate the cardholder. Banks do not disclose the exact nature of this information, but card expiry date is probably included, as expired cards are retained by automatic teller machines.

Summary

• A credit card is a card allowing the purchase of goods and services.
• You can apply for a credit card at many financial institutions.
• You receive a line of credit, or credit limit.
• You must pay the minimum monthly balance each month.
• To avoid paying interest, pay in full each month.
• Each card has three security measures: a unique account number, a signature panel and a magnetic stripe.
• Sign your card immediately.
• Always report lost and stolen cards immediately.

Article correct at its author date: Dec 2006. Copyright Virtual Office Space, Any unauthorised reproduction of this article will be prosecuted to the full extent of the law. Credit Cards Australia.

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