DEFINITIONS
———–

First some terms, along with the meanings they have in the industry:

Cardholder – an individual to whom a credit card is issued. Typically,
this individual is also responsible for payment of all charges made
to that card. Corporate cards are an exception to this rule.

Card Issuer – an institution that issues credit cards to cardholders.
This institution is also responsible for billing the cardholder for
charges. Often abbreviated to “Issuer”.

Card Accepter – an individual, organization, or corporation that
accepts credit cards as payment for merchandise or services. Often
abbreviated “Accepter” or “merchant”.

Acquirer – an organization that collects (acquires) credit
authorization requests from Card Accepters and provides guarantees
of payment. Normally, this will be by agreement with the Issuer of
the card in question.

Many issuers are also acquirers. Some issuers allow other acquirers to
provide authorizations for them, under pre-agreed conditions. Other
issuers provide all their own authorizations.

TYPES OF CARDS
—– — —–

The industry typically divides up cards by the business of the issuer.
So there are bank cards (VISA, Master Card, Discover), Petroleum Cards
(SUN Oil, Exxon, etc.), and Travel and Entertainment (T&E) cards
(American Express, Diners’ Club, Carte Blanche). Other cards are
typically lumped together as “Private Label” cards. That would include
department store cards, telephone cards, and the like. Most private
label cards are only accepted by the issuer. People are starting to
divide the telephone cards into a separate class, but it hasn’t re-
ceived widespread acceptance. (This is just a matter of terminology,
and doesn’t affect anything important.)

Cards are also divided by how they are billed. Thus there are credit
cards (VISA, MC, Discover, most department store cards), charge cards
(American Express, AT&T, many petroleum cards) and debit cards. Credit
cards invoke a loan of money by the issuer to the cardholder under
pre-arranged terms and conditions. Charge cards are simply a payment
convenience, and their total balance is due when billed. When a debit
card is used, the amount is taken directly from the cardholder’s ac-
count with the issuer. Terminology is loose – often people use “credit
card” to encompass credit cards and charge cards.

A recent phenomenon is third-party debit cards. These cards are issued
by an organization with which the cardholder has no account relation-
ship. Instead, the cardholder provides the card issuer with the infor-
mation necessary to debit the cardholder’s checking account directly
through an Automated Clearing House (ACH), the same way a check would
be cleared. This is sort of like direct deposit of paychecks, in re-
verse. ACHs love third-party debit cards. Banks hate them.

Another recent addition is affinity cards. These cards are valid
credit cards from their issuer, but carry the logo of a third party,
and the third party benefits from their use. There is an incredible
variety of affinity cards, ranging from airlines to colleges to profes-
sional sports teams.

HOW THEY MAKE MONEY
— —- —- —–

Issuers of credit cards make money from cardholder fees and from inter-
est paid on outstanding balances. Not all issuers charge fees. Even
those that do, make most of their money on the interest. They really
LIKE people who pay the minimum each month.

Issuers of charge cards make money from cardholder fees. Some charge
cards actually run at a loss for the company, particularly those that
are free. The primary purpose of such cards is to stimulate business.

Issuers of debit cards may make money on transaction fees. Not all
debit card transactions have fees. Most debit cards exist to stimulate
business for the bank and to offload tellers and back-room departments.
To date, third-party debit cards exist solely to stimulate business.
Providers of such cards make no direct money from their use.

Acquirers make money from transaction charges and discount fees. Unlike
the charges and fees mentioned above, these fees are paid by the ac-
cepter, not (directly) by the cardholder. (Technically, it is not le-
gal for the merchants to pass these charges directly to the consumer.
Some petroleum stations have gotten away with giving a discount for
cash, and it has survived court challenges so far.) Transaction charges
are typically in pennies per transaction, and are sensitive to the type
of communication used for the authorization. Discount fees are a per-
centage of the purchase price and are sensitive to volume and compli-
ance to rules. One way to encourage merchants to follow certain
procedures or to upgrade to new equipment is to offer a lower discount
fee.

Until fairly recently, the only motivation for accepters was to expand
their business by accepting cards. Reduction of fraud was enough rea-
son for many merchants to pay authorization fees, but in many cases, it
isn’t worth the cost. (That is, it is cheaper to pay the fraud than to
prevent it.) Recently, electronic settlement has provided merchants
with an added benefit by reducing float on charged purchases. Merchants
can now get their accounts credited much faster than before, which
helps cash flow.

Companies that issue charge cards are real keen on float reduction. The
sooner they can bill you, the sooner they get their money. Credit card
companies are also interested in float reduction, since the sooner they
bill, the sooner they can start charging interest. Debit cards
typically involve little or no float.

Affinity cards usually pay a percentage of purchases to the affinity
organization. Although it may seem obvious to take this money from the
discount fee, this doesn’t work since the issuer is not always the
acquirer. The money for this usually comes from the interest paid on
outstanding balances. Essentially, the bank is giving a share of its
profits to an organization in turn for the organization promoting use
of its credit card. The affinity organization is free to use its cut
any way it wishes. An airline will typically put it into the frequent
flyer program (and credit miles to your account). A college may put
the money into the general fund or into a scholarship fund. Lord only
knows what a sports team does with the money!

THE PLAYERS AND THEIR ROLES
— ——- — —– —–

American Express (AMEX) is a charge card issuer and acquirer. (Their
other businesses are not important to this discussion.) All AMEX pur-
chases are authorized by AMEX. They make most of their money from the
discount fees, which is why they have the highest discount fee in the
industry. That’s one reason why AMEX isn’t accepted in as many places
as VISA and MC, and a reason why many merchants will prefer another
card to an AMEX card. The control AMEX has over authorization allows
them to provide what they consider to be better cardholder
(“cardmember” to them) services.

VISA is a non-profit corporation (SURPRISE!) that is best described as
a purchasing and marketing coalition of its member banks. VISA issues
no credit cards itself – all VISA cards are issued by member banks.
VISA does not set terms and conditions for its member banks – the banks
can do pretty much as they please in signing cardholders. All VISA
charges are ultimately approved by the card issuer, regardless of where
the purchase was made. Many smaller banks share their account
databases with larger banks, third parties, or VISA itself, so that the
bank doesn’t have to provide authorization facilities itself.

Master Card (MC) is very much like VISA. There are some differences
that are important to those in the industry, but from the consumers
standpoint they operate pretty much the same.

Discover cards are issued by a bank owned by Sears. All Discover pur-
chases are authorized by Sears.

Most petroleum cards, if they are even authorized, are authorized by
the petroleum company itself. There are exceptions. Fraud on petro-
leum cards is so low that the main reason for authorization is to
achieve the float reduction of electronic settlement.

If you’ve never had a credit card before, you might have a hard time getting approved for a gasoline credit card. These cards are normally designed for people with good to excellent credit histories. But if you want to see a list of offers, you can visit:

http://www.asapcreditcard.com/gasoline-cards.html

If you don’t have any credit history, you might have to settle for a card designed for people with poor / no credit. While these cards tend to have higher interest rates (and additional fees) when compared to ‘standard’ credit cards– they’ll help you build your credit and improve your credit score. You can find a complete list here:

http://www.asapcreditcard.com/unsecured-offers.html

Eventually, with regular on-time payments– you’ll be able to apply for better offers with lower APR’s, less fees and rewards (like gas cards).

Hope this helps. GOOD LUCK!