A plastic money card is a thin card that contains identification information such as a signature or picture, and authorizes the card holder to charge purchases or services to the card holder’s account. Today, the information on the card is read by automated teller machines (ATMs), banks, and the internet.
It all started in the 1920s, when individual companies (such as oil companies and hotels) issued these “plastic money cards” for purchases made at their businesses. However, these cards could not be used outside of the company.
In the 1950s a “universal card” was introduced by Diners Club, INC. This was when credit cards were made. These cards allowed the card holders to use the cards in various locations and businesses. The way the cards worked was that there were annual fees, and depending on the plan, the card holders were billed either monthly or yearly.
Later on the “bank credit card system” was introduced. Under this system, the bank credits the account of the merchant at each sale and bills to the card holder at the end of the billing period to account for the sale. The card holder, in turn, pays the bank either the entire balance or in monthly installments with interest. This is the system that all credit cards are under today. Now there are three different types of cards: credit cards, debit cards, and prepaid cards.
Credit cards are cards that offer customers and businesses short-term lines of credit. This allows for the customer to pay for unexpected/large expenses without actually paying for the product that second. Instead, when using the credit card, the card holder is borrowing money that they must pay back over a short period of time. Credit cards also can be used for every purchases and it builds up the customer’s credit history. This credit history is actually quite important. If the customer has a good credit they can apply for mortgages, vehicle loans, etc. Businesses and insurance companies sometimes even look at the customer’s credit history to see if they are a good candidate for their organization. Without a credit history, one cannot do any of the things stated above.
What actually goes on in a transaction through a credit between and a merchant and card holder is quite interesting. First, there is a limit set on how much the card hold can borrow. This limit is called the credit limit and is decided by the card issuer’s on the basis of the card holder’s credit history. To pay using a credit card the card holder’s or merchant swipes the card through a terminal. This terminal transfers information to the financial institution that issued the card to the card holder. If the amount is not over the credit limit and the security technology doesn’t suspect fraud, the transaction is approved. This approval happens within seconds. After this approval, the credit limit is reduced by the amount that the card holder just ‘paid’.
Just about every month, the financial institution that issued the card mails the card holder a ‘statement’. This statement tells the card holder about all the transactions that took place over the previous month. The card holder can do two things at this moment, he/she can decide to pay the balance in full for the month or pay a little bit of the expenses and pay the rest the over the next couple of months. If the card holder pays in full that month then they do not get charged any extra fees and just partook in a free loan. If they decide to pay over the next few months, they are charged various fees on top of the expense for the good or service. These are the fees that give Card providers its revenue.
Compared to popular thinking, the debit card was not created before the credit card, but actually many years later. A debit card is like a credit card but the things the customer is paying for is coming straight out of their deposit or brokerage account. This means that when the customer is using their card they do not pay off the money that the card just paid for. Instead, the money is directly taken out of the customer’s checking account (in their bank) and directly deposited into the merchant’s account. The Customer can also access their checking account through these cards by using an ATM. This allows for easy access to cash anywhere the customer is.
The first debit card transaction, using an ATM card and personal identification number (PIN), occurred in the 1980s, and the first debit transaction authorized by a signature rather than a PIN was processed in 1988.(MasterCard: All About Payment Cards). No matter how new these debit cards are they are still much more popular today than credit cards. Actually, by 1995, debit cards overtook credit cards in popularity, and the use of checks started to decline in 1998.
A prepaid card is a card where a set amount of money is deposited into the card prior to its first use. During a transaction the money is directly taken out of the card’s value. There are two types of prepaid cards: single-purpose and multipurpose cards. A single-purpose card, also known as a closed-loop card, is only used for a certain place such as a certain department store or a telephone card in which one can only use it to call people. Multipurpose cards, also known as an open-loop card, are cards that are bought through banks and has the bank’s logo branded onto the card. The only difference between these cards and credit/debit cards is that there is a set amount of money in the card. The card holder accesses the money at any ATM and can pay for goods and services anywhere he/she pleases. As soon as the money runs out, the card is worthless.