The Secret Behind Credit Card Companies

What is a Credit Card?

A credit card is a plastic card that enables an individual to purchase goods, products or services by way of a credit line. The available credit and the card itself are offered by a financial institution, such as banks or credit card companies. These institutions will offer an individual (with a satisfactory credit score) a credit card that is accompanied by various terms and interest rates.

The interest rates are based off the individual’s credit score. Those with higher scores, meaning they are more likely to meet the terms and repayment schedules in the agreement, will be awarded with a lower interest rate and vice versa.

What are Credit Card Companies?

Credit card companies are financial institutions who lend credit to consumers or businesses. In essence, the issuance of a credit card is a form of loan. The individual is given a line of credit that he or she may use to purchase goods. When goods are purchased, the individual must repay the issuing credit card company, plus any additional interest that falls under their specific plan.

Credit card companies, such as MasterCard or Visa, will lend lines of credit to only those individuals who they feel are credit-worthy, meaning the borrower is likely to pay off his or her credit card debts. If the individual fails to pay off their debts, credit card companies will implement various late charges, interest rates and other fees.

If the individual fails to meet the demands of their repayment schedule entirely, the issuing credit card company will hire a debt collector or initiate an injunction against the holder of the card.

Costs for Credit Card Companies

Banks or credit card companies typically borrow the money they lend to their clients or customers. Credit card companies will receive low-interest loans from other institutions and flip these loans to their clients at higher rates. For instance, credit companies may charge 15% on money lent to cardholders if the initial cost of borrowing was 5%. In this example, credit card companies will earn 10% on the loan offered to individual customers or clients.

In addition to the money spent on original loans, credit card companies have considerable operating costs. These costs refer to the amount of money needed to run a credit card portfolio, including paying employee salaries, printing the cards, mailing statements, protecting clients from fraud, marketing and running computers to track every cardholder’s balance.

Credit card companies also face costs when a consumer becomes severely delinquent on a payment (severe delinquency is typically regarded after six months without payment). In instances of severe delinquency, the credit card companies will declare the debt to be charged-off. The credit card companies will then list the failures of the holder on the debtor’s credit bureau reports. A charge-off is viewed as uncollectable. To credit card companies these bad debts are viewed as the cost of doing business.

Credit Card Companies Legality

Credit Card Companies will typically fall under the jurisdictions of both Finance Law and Commercial Law.

Finance Law is the legal specialty regulating and overseeing legislation applicable to the exchange and the circulation of monies. This takes place in both transfer activity undertaken involving hard currency, as well as Credit Card Companies.

The precepts of Finance Law ensure that all terms latent within Credit Card Companies adhere to the Truth in Lending Act, which ensures that the terms of all Credit Card Companies are expressed clearly upon applying for credit with Credit Card Companies.

Commercial Law is the legal field that enacts the regulatory oversight of standards and practices occurring within the commercial marketplace. With regard to Credit Card Companies, statutory legislation undertaken within the precepts of Commercial Law ensures that any nature of predatory lending or financial exploitation is determined to be an illegal offense.

Amongst the many types of legislation applicable to Commercial Law, the Fair Billing Credit Act provides consumer relief from billing procedures considered to be exploitative and deceptive.

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