CREDIT/DEBIT/TRAVEL CARDS

Until the 1920s, consumer purchases in the United States were made primarily in one of two ways: cash or personal check. However, in that decade, a new means of payment was introduced—the credit account. While credit transactions had been common for a long time in business to business dealings, they were new to the consumer market. The credit account allowed a consumer to defer payment on a purchase made today to some time in the future: thus, the expression "buy now, pay later" was born. Evidence of the credit account typically took the form of a card—the credit card.

Since the 1920s, different types of credit cards have emerged. In addition, related types of cards have also appeared on the consumer scene: the debit card, as well as the ATM card and the smart card, and the travel card and charge card.

CREDIT CARDS

A credit card is a pocket size, plastic card that allows the holder to make a purchase on a credit account that will be repaid at some time in the future. Repayment may be in a single amount or in a series of amounts. At a minimum, the credit card will include identification of the user by name, account number, and signature.

The earliest issuance of credit cards in the United States was by gasoline companies and retail stores. Thus, it was quite common in the first half of the twentieth century to carry a credit card from Esso, Sears, and/or a local department store. These early cards were issued by the private company itself based on the credit policy of that company. Many of the accounts were expected to be paid in the month following purchase. Others were revolving charge accounts in which partial payment was expected every month, with a charge for interest on amounts not paid promptly.

If the balances of the credit accounts were not paid, the issuing firm took the loss. Thus, deciding to issue a credit card was a thoughtful process on the part of the firm. Often, the three Cs of credit were applied to a credit applicant: character, capacity, and capital. Character referred to the record of the applicant in paying previous accounts—his or her credit history. Capacity meant the earnings potential (salary) of the applicant. Capital referred to the net assets (assets minus liabilities) of the person. Obtaining a credit card was far from an automatic process.

Major changes in the nature and types of credit cards occurred in the 1950s. Two types of credit cards emerged in that decade: the charge card and the bank credit card.

The bank credit card expanded the idea of a credit card company to a much broader usage—virtually every merchant and service provider worldwide. The 1959 BankAmericard from the Bank of America in California became the VISA card. The 1970s saw the birth of Master Charge, which became MasterCard. These cards are issued by banks, so one applies to a bank for the credit card. A preset credit limit is assigned to the card user. After an item is charged at a firm, the firm receives payment from the bank. The bank charges a fee to the firm, pays the firm the net amount, and then collects from the consumer. The consumer usually pays an annual fee to the bank and is charged interest on the unpaid balance at the end of each month. Credit cards may also be used to make a cash advance from the bank. However, it should be remembered that interest rates on cash advances using a credit card can be much higher than the rates for credit card purchases. Thus, the cash advance feature should be used wisely.

While at one time it was difficult to earn credit, the process is far easier at the present time. Banks compete for customers for their credit cards and often solicit college students with limited capital and offer them credit cards. Telemarketing of credit cards is frequent. Low credit limits are relatively easy to obtain. Demonstrating a solid payment record and growth in earnings then leads to higher limits.

Managing one's credit is important to the consumer. It is critical never to get into a position in which one has so many credit cards and so many high balances that the credit bills never get paid off. For example, if you have a bank credit card with a balance of $1,000 and an interest rate of 18 percent a year or 0.083 percent a month (18 percent divided by twelve months), the interest for the current month will be $15 ($1,000 × .015). If the payment made on the account this month is only $25, then the first $15 is for interest; the remaining $10 ($25–$15) reduces the principal of $1,000 to $990 for the next month. In other words, more has been paid for interest than for what was purchased; the situation in the following month will change very little. At this rate of payment, it could be several years before the balance is reduced to zero. In the meantime, if the card has been used for more purchases, the cycle of remaining in debt continues. Credit card management is critical to a consumer. In fact, one who has difficulty in dealing with credit cards might be better off with debit cards.

DEBIT CARDS

A debit card is also issued by a bank and looks like a credit card, but it works very differently. When one uses a debit card, the amount spent is deducted immediately from the user's bank account. It is as if one is paying by check without having to write a check. There will be no unpaid future bills, for the payment is made at the time of the expenditure. For example, many people today purchase groceries with the debit card by running it through the card reader at the grocery store check out counter. In addition, people often get extra cash while paying for the groceries with that debit card.

It is helpful to know how a bank account works from the bank's point of view to fully understand the debit card. When an amount is added to a bank account, such as by a deposit, the individual's account is credited; when an amount is subtracted from that bank account, such as by writing a check, the account is debited. Thus, the term

debit card states what happens to the bank account when the card is used—an immediate subtraction.

A common function of the debit card is as an ATM card. ATM stands for the Automated Teller Machine that so many use today. ATMs allow for 24-hour banking. The card holder is able to make deposits, find out bank balances, transfer money from account to account, and make a loan payment. The ATM/debit card can also be used to obtain cash; the amount withdrawn is subtracted immediately from the bank account and thus is another use of a debit card.

The user of the debit card must take particular care in keeping records of expenditures with the debit card. Unlike the check that usually is recorded at the time of payment, the debit card expense has its record in the form of a sales slip, a register receipt, or a record of an ATM withdrawal or deposit. Debit card expenditures must be deducted from the bank account balance by the user in a regular accurate manner to avoid losing track of the account balance.

A variation on the debit card is the smart card. While the debit card uses a magnetic strip, the smart card typically uses an embedded semiconductor to store and maintain information. Smart cards have many uses, but in general are used for prepayment of an expense, such as when a phone card is purchased. The phone card has so many dollars in it that have been paid for in advance of use. As the card is used, money value is deducted. Other applications of the smart card are for the payment of tolls and for the purchase of gasoline. In both cases, the card can be waved at a reader that will record the toll or the purchase of gasoline. Food plans at colleges and transit cards on subway systems are other uses of the smart card. Using a smart card saves that sudden search for change to pay a toll or to make a phone call.

TRAVEL CARDS

Travel cards, also called travel and entertainment cards, fall into two categories. The first is the charge card mentioned earlier. A charge card is issued by a firm whose main product is credit granting in order to purchase a service. The first two companies in this field were Diners' Club, Inc., and American Express Company. In both cases, one is issued a card based on a credit check and then uses the card at designated establishments and with designated types of firms to pay for services or products. Payment is made not to a store nor to a bank, but rather to Diners' Club or to American Express. Diners' Club cards are used primarily at eating establishments. American Express cards are used for airlines, hotels, and other travelrelated activities. No credit limits are established for charge cards, but payment is expected in full within the next billing period to maintain one's credit record. However, a current change in the approach to the charge card has been made by American Express to allow monthly payments, just as if it were a bank credit card account.

A second type of travel card is issued by airlines or hotel chains. This card does not have direct money use, but serves instead as an upgraded service provider. Thus, included in this category are such cards as frequent flyer cards, with which airline mileage is accumulated, to be later used for upgraded or free flights. In addition, services are provided to the cardholder such as early boarding of flights and/or other amenities. Also included in this category are hotel chain cards that accumulate services at hotels in that chain. Room upgrades, speedy check in and check out, and help with reservations are among the benefits of this type of card. Furthermore, many hotels are partners with airlines, so money spent at a hotel can result in additional miles on the airline mileage account.

A growing trend among the airlines is the issuance of airline MasterCards or VISA cards. The airlines work with a bank to issue standard bank credit cards with one modification: every dollar spent using that credit card is turned into airline mileage that can be turned in for airline tickets and/or upgrades in travel classification. Thus, the benefit of the bank credit card is joined with the value of the airline travel card.

SUMMARY

From a time when what was bought was paid for on the spot, "plastic" has changed the way that consumers do business and handle personal financial functions. Credit cards allow a purchase now with payment in the future. Debit cards result in an immediate deduction from a bank account without writing a check. Smart cards allow for prepayment of expenses to aid in convenience when the expense needs to be paid. Travel cards permit charging of travel related expenses and the accumulation of travel services and benefits. All of these items are part of a paperless financial society accessed by cards of various types. In fact, it is possible that the day of cards will at some point end and another means will be found to connect payments for purchases. Until then, given the many ways to purchase, wise consumerism is needed for the correct choice of cards for an individual.

Burton S. Kaliski