Credit cards are unstructured debt accounts linked to a plastic card that allows the holder to make purchases from retailers that accept the card. Common credit card networks in the U.S. include Visa, MasterCard, Discover, and American Express.
A credit card is a form of unstructured, short-term debt available to individuals and corporate entities, allowing for the "cardholder" to make retail purchases and other payments without requiring the use of cash or checks, which present risk to one or both parties to the transaction.
The idea was first popularized by the Diner's Club card, launched in 1950 to provide an easy-to-use alternative to then-traditional "letters of credit". These letters were issued by a bank, and identified the holder as "credit-worthy", allowing the holder to present them at another bank or financial institution to obtain cash. These letters had several issues regarding trust and proof of identity, and generally were only presentable at banks with a pre-existing relationship with the bank issuing the letter. These problems were initially solved by the American Express Company with its popular "Traveler's Checks"; Diner's Club took the idea a step further by requiring the holder to carry only a small durable card, instead of the paper checks. American Express soon followed with its now-ubiquitous charge card brand, followed in turn by Bank of America which released its BankAmericard, which would eventually become Visa.
The modern credit card in the United States is a durable plastic card with the name of the "cardholder" to whom it is issued, the card's unique number, and certain other identifying information imprinted on it. Most also have a magnetic stripe which contains the same information in a form easily available to computerized card reader systems. This card is linked by its number to a debt account held by a bank. Other systems used in Europe and Asia, such as "smart card" technologies, allow the card to hold more data, and also allow for "multi-factor" authentication by encrypting the card's digital contents, requiring a "PIN code" committed to the cardholder's memory in order to obtain the card data using a reader.
Most credit cards are accepted by retailers that subscribe to that card's "network". Each major card type has its own network, allowing a large "many-to-many" relationship between the banks issuing cards to cardholders and the banks of merchants accepting the cards for payment. Current major U.S. credit card networks include Visa and MasterCard, which were formed by alliances of multiple member banks and comprise the overwhelming majority of bank-issued credit cards, and American Express and Discover, which were formed and are managed by single financial institutions. A retailer's bank will usually allow electronic deposits of funds from any card network, even if that bank only issues cards on one network.
When the card is swiped, the cardholder is implicitly agreeing to pay the issuing bank for the amount of the purchase; the issuing bank is, in turn, promising to "front" the money to the retailer on behalf of the cardholder. The borrower is usually given a 30-day "grace period" during which there is no interest charged, allowing the holder to use it as a form of "grace card". After this time has elapsed, any balance remaining on the card is charged an interest rate, usually between 8 and 18% for borrowers in good standing, but considerably higher for cardholders who are behind on payments or who have made other mistakes with credit.
In recent years, credit card networks such as Visa and MasterCard have begun marketing "debit cards". These are a combination of credit card and ATM card, and instead of being tied to a debt account, they are linked to the cardholder's checking account. They provide much the same protections from fraud and theft as a traditional credit card, and can be used anywhere that the credit card is accepted, but because there is no debt involved, the costs to the cardholder of using a debit card are typically small or nonexistent.
