Wednesday, September 9, 2009

Credit-Card Users

Credit-Card is used for very different purposes depending upon social class, education, income, and lifestyle of the user. Customers who use their credit cards merely as a substitute for cash are referred to as convenience users. These people tend to be in the upper-middle or top income earning brackets and do not necessarily seek out stores accepting their cards. Customers who purchase large items (such as furniture, appliances, and gifts) or maintain large outstanding credit-card balances are referred to as installment users because they pay only a portion of their outstanding balances each month. These individuals frequently are in lower and middle- income brackets.
For both convenience and installment users, the principal advantage of credit cards is convenience. There is no minimum number of transactions for which the card must be used. Also, as two or three cards have become more widely accepted in thousands of stores, the number of different plastic cards needed by the customer has been reduced. The installment feature of the credit card is a major attraction because it functions as a revolving line of credit. In addition, the card itself serves to identify the customer and records pertinent information when the privilege of using the card is exercised.
To most merchants the credit card has been a positive financial innovation because it increases the potential number of customers and allows smaller firms to compete with larger ones. Banks and credit-card companies do collect a discount fee, however, on the dollar volume of a merchant‘s credit-card sales. This charge is designed to compensate the lender for the expenses of credit investigation, bookkeeping, and collections. the actual discount fee charged is negotiable but typically is inversely related to the volume of a merchant‘s sales and the average size of credit-card purchases. A store with membership in a credit-card plan deposits card sales slips along with other receipt in its account at a bank or other financial institution. If the receiving financial institution is merely an agency rather than a card -issuing institution, it forwards the credit slips through correspondents to the card issuer. It is the card-issuing firms who generally bear the full risk of buyer default or fraud, though some risk also may be shared with participating agency institutions.
Today, the largest credit-card programs generally operate at a profit. In the beginning, however, most card programs were confronted with substantial losses. Both credit delinquencies and losses due to fraud were high, due in large part to indiscriminate mass mailing of cards to customers. Moreover, the heavy cost of processing many small purchases of goods and services was not fully considered. Also, most banks and credit-card companies under-estimated the problem of controlling bad-debt losses. Today, however, the major credit-card programs in the United States are at least 20 to 30 years old. This long-term experience with operating problems has paid off in recent years. Nationwide acceptance of cards and the card interchange program have pushed the volume of activity in the largest card programs beyond the break-even point.

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