Credit card numbering

The numbers found on credit cards have a certain amount of internal structure, and share a common numbering scheme.

The card number's prefix, called the Bank Identification Number, is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs. This is the first six digits for MasterCard and Visa cards. The next nine digits are the individual account number, and the final digit is a validity check code.

In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and security codes. Not all credit cards have the same sets of extra codes nor do they use the same number of digits.

 

Credit cards in ATMs

Many credit cards can also be used in an ATM to withdraw money against the credit limit extended to the card but many card issuers charge interest on cash advances before they do so on purchases. The interest on cash advances is commonly charged from the date the withdrawal is made, rather than the monthly billing date. Many card issuers levy a commission for cash withdrawals, even if the ATM belongs to the same bank as the card issuer. Merchants do not offer cashback on credit card transactions because they would pay a percentage commission of the additional cash amount to their bank or merchant services provider, thereby making it uneconomical.

Many credit card companies will also, when applying payments to a card, do so at the end of a billing cycle, and apply those payments to everything before cash advances. For this reason, many consumers have large cash balances, which have no grace period and incur interest at a rate that is (usually) higher than the purchase rate, and will carry those balance for years, even if they pay off their statement balance each month.

 

Fees charged to customers

The major fees are for:

• Late payments
• Charges that result in exceeding the credit limit on the card (whether done deliberately or by mistake), called overlimit fees
• Returned cheque fees or payment processing fees (eg phone payment fee)
• Cash advances and convenience cheques (often 3% of the amount). Transactions in a foreign currency (as much as 3% of the amount). A few financial institutions do not charge a fee for this.
• Membership fees (annual or monthly), sometimes a percentage of the credit limit. Issuers love monthly fees as it allows them to charge substantial amounts without the customer realizing how expensive the charge really is (a monthly amount is perceived as half the price of the equivalent annual fee)
• Foreign Exchange Premium

Payment Allotment

Credit card companies will apply your payment to a balance with a lower interest rate before a balance with a higher interest rate. If you have a balance from a transfer with an interest rate of 2% and a balance from point of sale purchases with an interest rate of 8%, your payment will affect the purchase balance only after the transfer balance has been paid in full.

Hidden costs

Merchants pay a negotiated fee -- typically 1-3% for larger merchants and 3-6% for smaller merchants -- to process credit payments. They must also bear the cost of providing a point-of-sale solution to enable the acceptance of card transactions and other card services related expenses. Credit card issuers understand full well that if card holders were aware of and made to pay these additional costs with their purchases it would tend to discourage credit card usage. As a consequence, businesses who accept credit cards often must sign a "merchant agreement" or contract with the acquirer that stipulates that they are not allowed to offer different prices for card and non-card transactions (sometimes referred to as surcharging) despite the additional costs to the business for accepting the cards. The prohibition on surcharging or cash discounts is enforced by law in some countries, although some governments are beginning to lift this restriction (see below)

 

Some critics have observed that this results in what is effectively a hidden expense on all transactions conducted by merchants who accept credit cards since they must build the cost of transaction fees into their overall business expense. Furthermore, cash and other non-credit card using customers are in effect made to subsidize credit card user purchases. The cost of the convenience and protections enjoyed by card holders and the profits taken from transaction fees by the card industry (which has come to rely increasingly on this revenue stream over the years) is in part borne by the non-card purchaser. Critics further note that the customers most likely to pay in cash are probably the least able to afford the additional expense, the argument going that card holders are more likely to be affluent and non-card holders less so.

A counterargument is that there are also costs to the merchant in other forms of payment. For cash payments these include frequent trips to the bank or use of an armored delivery service, theft, and employee error, such that cash is actually not cheaper for the merchant than credit cards. This argument is probably specious under most circumstances, however, considering that many merchants would offer a discount for cash-paying customers were they allowed, and indeed, do so where it is legal. The fact that laws exist or have existed that prohibit such practices and that the major card issuers strongly discourage such practices can be taken as an indicator that cash transactions do not have as much cost associated with them as credit card transactions.

To illustrate, some companies offer incentives or bonus coupons for using cash, such as Canadian Tire Money. Australia is currently acting to reduce this by allowing merchants to apply surcharges for credit card users.

In the United Kingdom, merchants won the right through The Credit Cards (Price Discrimination) Order 1990to charge customers different prices according to the payment method, but few merchants do so (the most notable exceptions being budget airlines, travel agents and UK government agencies, such as the DVLA). The United Kingdom is the world's most credit-card-intensive country, with 67 million credit cards for a population of 59 million people

In the United States, until 1984 federal law prohibited surcharges on card transactions. Although the federal Truth in Lending Act provisions that prohibited surcharges expired that year, a number of states have since enacted laws that continue to outlaw the practice; California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Maine, New York, Oklahoma, and Texas have laws against surcharges. Regardless of what state one resides in or purchases a product, however, both Visa and MasterCard have publicly stated that surcharges on credit card transactions are against the rules.

There also exists an economic argument that credit card use increases the "velocity" of money in an economy. The result, according to the quantity theory of money, is an effective increase in the money supply, as more money is flowing through the economy at a given time.