I do not understand the credit card system-I know so many people who charge things that they do not have money

Question

for and then they go deep into debt-tens of thousands of dollars.
And they can't pay it off, so it is like they got free money and goods. I don't get it-if they don't pay and they don't get arrested then what is the motivation to pay back what they owe. Could someone please explain how the system protects itself? A person could charge tons of money and then what? What if they die, or don't have any money in the bank? I mean, what else happens besides them getting hounded by collection agencies? I do not have a credit card because I don't believe in spending what I don't have, but I see so many people living so high on the hog and they don't have the money to do so and I don't see any punitive action that motivates them to pay...so, what's up with that?

Answer 1

Credit card companies give incentives to people for using them, like free airline tickets or low interest rates. People also like the idea of not having to pay for something until the end of the month.

Now, to protect the system, the companies usually approve people who actually have something of value, that way they can reposess something and get some money out of it. Most credit cards also have a limit on how much money can be charged to them in a month.

They also make people sign a form that says they will pay it back each month, and if they dont then the credit card companies have right to take what is yours (money, material posessions, cars, houses) to pay back what you owe.

Answer 2

In a nutshell, if you have a credit card it was issued in good faith that you would be good at your word to pay back what you put on the card. Many, Many peopl abuse this luxury (and it is a luxury, it's not a requirement) If you start off paying your bills then great, You're establishing credit - and believe me there is NOTHING as important as having good credit; trust me. So if your friends try to spend to the max and not pay it back? Yes they will get harrassed, beyond anything anyone would ever wish his worst enemy. But after that harrassment, the next step is to litigate; And it used to be that it never got this far, but laws changed last year and ironically the banks were the ones who lobbied to get them changed, they were trying to collect all this bad debt and stop bankruptcys what they didn't realize is that people that aren't paying them off DON'T HAVE THE MONEY; so they stopped bankruptcy's but are no better off. The reality right now is your frineds that are living high on the hog are like people who play the lottery every week thinking" this week is my week" they are always counting on money coming from tomorrow. I respect that you don't have any credit cards, but in the interest of BUILDING credit and since you seem so responsible, you should have ONE card; You can use it for emergency's or whatever, just use it once a month and pay it off at the end of the month. You will be starting a golden credit history and good credit in this country right now, it's better than cash, land, stocks, etc. so do it and protect it

Answer 3

Heres how it works.

They charge the items they "buy" at the store and take it home.

A month later they get a bill asking for a payment towards the balance. That balance keeps aquiring interest. This much you know.

When they dont pay, yes they get hounded by collection agencies, and there isnt much more they can do. However... the kicker here is BAD CREDIT.

With bad credit, itll be either impossible or very difficult to:
-get a student loan
-get a car
-get a house
-get an apartment
-get a cell phone
-get any goverment job, including the military
-get almost any DECENT job, as lots of them perform credit checks
-rent a car, or almost anything of value

You have to understand, first of all, that credit agencies typically dont just "give away" credit. First time users get a very small amount (less than $1,000 usually) until they prove their creditworthiness, and that limit is generally frozen until the entire balance is paid off. In other words, sure they can be delinquent on 1,000 bucks their entire life, but the bad credit that it will bring them will:
1) ensure that their credit limit is never raised, so it never goes beyond that and;
2) ensure that it will be difficult or impossible to get another credit card or loan in which they can rack up more debt.

In situations where they already have many credit cards and rack up a huge debt, this debt is passed on to the next-of-kin. My stepfather was recently handed a tidy sum of nearly $80,000 in credit card debt racked up by his late mother on shopping sprees. Not a fun situation.

The motivation is to maintain good credit so that you can do all of the above things, and so that you dont screw your children over and force them into a terrible financial situation (hopefully something no parent wants).

Answer 4

If you buy something you can't pay for, eventually you have to file for bankruptcy, which means not only can you not get a credit card for 7 years, but you can't buy a car, a house, or anything like that without having the actual cash on hand because you are too big of risk.

Answer 5

First you should know that for having a credit card you should have a work with good earning/property or anything by which you can proof that the money which you will use by using credit card will be returned back with some additional percentage. And that will be deducted from your Bank account. There should be enough cash to use Credit card.
The reason why people use credit card is, they do not carry large amount of money. Easy to carry credit card then money. Some company protect credit card user in case of cheating or fraude even if you break a costly item in a shop the credit card company will compansate. If you purchase an aeroplane tickets by using credit card you are fully protected in case of sickness, accident or death as per American Express.

If you used credit card and don't have money then there will be legal problems you will have to face. Therefore, before signing a form better read terms and conditions.

IA Bit of History
Let's start at the beginning. A credit card is a thin plastic card, usually 3-1/8 inches by 2-1/8 inches in size, that contains identification information such as a signature or picture, and authorizes the person named on it to charge purchases or services to his account -- charges for which he will be billed periodically. Today, the information on the card is read by automated teller machines (ATMs), store readers, and bank and Internet computers.
Timeline

According to Encyclopedia Britannica, the use of credit cards originated in the United States during the 1920s, when individual companies, such as hotel chains and oil companies, began issuing them to customers for purchases made at those businesses. This use increased significantly after World War II.

The first universal credit card -- one that could be used at a variety of stores and businesses -- was introduced by Diners Club, Inc., in 1950. With this system, the credit-card company charged cardholders an annual fee and billed them on a monthly or yearly basis. Another major universal card -- "Don't leave home without it!" -- was established in 1958 by the American Express company.

Later came the bank credit-card system. Under this plan, the bank credits the account of the merchant as sales slips are received (this means merchants are paid quickly -- something they love!) and assembles charges to be billed to the cardholder at the end of the billing period. The cardholder, in turn, pays the bank either the entire balance or in monthly installments with interest (sometimes called carrying charges).

The first national bank plan was BankAmericard, which was started on a statewide basis in 1959 by the Bank of America in California. This system was licensed in other states starting in 1966, and was renamed Visa in 1976.

Other major bank cards followed, including MasterCard, formerly Master Charge. In order to offer expanded services, such as meals and lodging, many smaller banks that earlier offered credit cards on a local or regional basis formed relationships with large national or international banks.

Have you ever stood behind someone in line at the store and watched him shuffle through a stack of what must be at least 10 credit cards? Consumers with this many cards are still in the minority, but experts say that the majority of U.S. citizens have at least one credit card -- and usually two or three. It's true that credit cards have become important sources of identification -- if you want to rent a car, for example, you really need a major credit card. And used wisely, a credit card can provide convenience and allow you to make purchases with nearly a month to pay for them before finance charges kick in.

That sounds good, in theory. But in reality, many consumers are unable to take advantage of these benefits because they carry a balance on their credit card from month to month, paying finance charges that can go up to a whopping 23 percent. Many find it hard to resist using the old "plastic" for impulse purchases or buying things they really can't afford. The numbers are striking: In 1999, American consumers charged about $1.2 trillion on their general-purpose credit cards.

In this article we'll look at the credit card -- how it works both financially and technically -- and we'll offer tips on how to shop for a credit card. (Experts say this should be a project on the scale of shopping for a car loan or mortgage!) We'll also describe the different credit-card plans available, talk about your credit history and how that might affect your card options, and discuss how to avoid credit-card fraud -- both online and in the real world.

By the Numbers
Although phone companies, gas companies and department stores have their own numbering systems, ANSI Standard X4.13-1983 is the system used by most national credit-card systems.

Illustration by Rosaleah Rautert
The front of your credit card has a lot of numbers -- here's an example of what they might mean.

Here are what some of the numbers stand for:

The first digit in your credit-card number signifies the system:
3 - travel/entertainment cards (such as American Express and Diners Club)
4 - Visa
5 - MasterCard
6 - Discover Card

The structure of the card number varies by system. For example, American Express card numbers start with 37; Carte Blanche and Diners Club with 38.
American Express - Digits three and four are type and currency, digits five through 11 are the account number, digits 12 through 14 are the card number within the account and digit 15 is a check digit.
Visa - Digits two through six are the bank number, digits seven through 12 or seven through 15 are the account number and digit 13 or 16 is a check digit.
MasterCard - Digits two and three, two through four, two through five or two through six are the bank number (depending on whether digit two is a 1, 2, 3 or other). The digits after the bank number up through digit 15 are the account number, and digit 16 is a check digit.

The Stripe
The stripe on the back of a credit card is a magnetic stripe, often called a magstripe. The magstripe is made up of tiny iron-based magnetic particles in a plastic-like film. Each particle is really a tiny bar magnet about 20-millionths of an inch long.

Illustration by Rosaleah Rautert
Your card has a magstripe on the back and a place for your all-important signature.

The magstripe can be "written" because the tiny bar magnets can be magnetized in either a north or south pole direction. The magstripe on the back of the card is very similar to a piece of cassette tape (see How Cassette Tapes Work for details).

A magstripe reader (you may have seen one hooked to someone's PC at a bazaar or fair) can understand the information on the three-track stripe. If the ATM isn't accepting your card, your problem is probably either:

A dirty or scratched magstripe
An erased magstripe (The most common causes for erased magstripes are exposure to magnets, like the small ones used to hold notes and pictures on the refrigerator, and exposure to a store's electronic article surveillance (EAS) tag demagnetizer.)
Information on the Stripe
There are three tracks on the magstripe. Each track is about one-tenth of an inch wide. The ISO/IEC standard 7811, which is used by banks, specifies:

Track one is 210 bits per inch (bpi), and holds 79 6-bit plus parity bit read-only characters.
Track two is 75 bpi, and holds 40 4-bit plus parity bit characters.
Track three is 210 bpi, and holds 107 4-bit plus parity bit characters.
Your credit card typically uses only tracks one and two. Track three is a read/write track (which includes an encrypted PIN, country code, currency units and amount authorized), but its usage is not standardized among banks.

The information on track one is contained in two formats: A, which is reserved for proprietary use of the card issuer, and B, which includes the following:

Start sentinel - one character
Format code="B" - one character (alpha only)
Primary account number - up to 19 characters
Separator - one character
Country code - three characters
Name - two to 26 characters
Separator - one character
Expiration date or separator - four characters or one character
Discretionary data - enough characters to fill out maximum record length (79 characters total)
End sentinel - one character
Longitudinal redundancy check (LRC) - one character
LRC is a form of computed check character.

The format for track two, developed by the banking industry, is as follows:

Start sentinel - one character
Primary account number - up to 19 characters
Separator - one character
Country code - three characters
Expiration date or separator - four characters or one character
Discretionary data - enough characters to fill out maximum record length (40 characters total)
LRC - one character
Authentication
There are three basic methods for determining whether your credit card will pay for what you're charging:
Merchants with few transactions each month do voice authentication using a touch-tone phone.
Electronic data capture (EDC) magstripe-card swipe terminals are becoming more common -- so is swiping your own card at the checkout.
Virtual terminals on the Internet
This is how it works: After you or the cashier swipes your credit card through a reader, the EDC software at the point-of-sale (POS) terminal dials a stored telephone number (using a modem) to call an acquirer. An acquirer is an organization that collects credit-authentication requests from merchants and provides the merchants with a payment guarantee.

When the acquirer company gets the credit-card authentication request, it checks the transaction for validity and the record on the magstripe for:

Merchant ID
Valid card number
Expiration date
Credit-card limit
Card usage
Single dial-up transactions are processed at 1,200 to 2,400 bits per second (bps), while direct Internet attachment uses much higher speeds via this protocol. In this system, the cardholder enters a personal identification number (PIN) using a keypad.

The PIN is not on the card -- it is encrypted (hidden in code) in a database. (For example, before you get cash from an ATM, the ATM encrypts the PIN and sends it to the database to see if there is a match.) The PIN can be either in the bank's computers in an encrypted form (as a cipher) or encrypted on the card itself. The transformation used in this type of cryptography is called one-way. This means that it's easy to compute a cipher given the bank's key and the customer's PIN, but not computationally feasible to obtain the plain-text PIN from the cipher, even if the key is known. This feature was designed to protect the cardholder from being impersonated by someone who has access to the bank's computer files.

Likewise, the communications between the ATM and the bank's central computer are encrypted to prevent would-be thieves from tapping into the phone lines, recording the signals sent to the ATM to authorize the dispensing of cash and then feeding the same signals to the ATM to trick it into unauthorized dispensing of cash.

If this isn't enough protection to ease your mind, there are now cards that utilize even more security measures than your conventional credit card: Smart Cards

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