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PERPECTIVES ON CREDIT CARD USE AND ABUSE Maniam, Balasundram Sam Houston State University firstname.lastname@example.org Earl, Ronald Sam Houston State University, email@example.com Abstract Over the past three decades, consumer credit card debt has been exponentially increasing and becoming a national dilemma. This study provides several statistics to establish the extent of consumer debt growth and the implications for economic growth are considered. Different types of credit cards are discussed along with several methods of segmenting cardholders. This study shows the rising usage and mismanagement of credit cards by college students is of concern. A number of advantages and disadvantages of using credit cards are highlighted. The paper also draws attention to credit card fraud, particularly identity theft, stolen cards, counterfeiting, and abuses by telemarketers, followed by several methods for reducing fraud. The issue of who is responsible for the nation’s credit card debt problem is discussed, focusing on consumer spending behaviors and aggressive marketing schemes used by credit card companies. The study will conclude with recommendations for an individual to follow when applying for a credit card. Introduction Between 1991 and 2001, consumer credit debt almost tripled from $247 billion to $700 billion. It is estimated that today more than 75% of Americans are credit cardholders, owning an average of 4.2 cards per person. Experts predict that by the year 2015, the percentage of the U.S. population owning at least one credit card will grow to 80% (Hogarth, 2002). This study will investigate the various issues related to consumer credit use. Several types of credit cards are available to consumers, such as bankcards, gasoline, travel and entertainment cards, store cards, and affinity cards. Some are limited to a certain chain of stores, while some offer benefits to reward usage. Credit card company’s segment cardholders into categories characterized by their spending behavior and balance carried forth. Cardholders have also been segmented by academics into two groups, convenient users and the credit users, based on their spending habits. However, a more common method for classifying cardholders is by income. A study by the U.S. Census Bureau found that 96% of consumers who earn more than $100,000 possess at least one credit card, while only 29% of consumers earning less than $10,000 have one. The study also observed a significant correlation between income class and propensity to carry a balance over to the following month (US Census Bureau, 2003). This paper also will discuss the rising usage of credit cards by college students. The majority of students own multiple cards with few paying off their balances every month and a significant number that have missed payments (Stanford, 1999). Students’ mismanagement of their debt is becoming a huge problem, exacerbated by the fact that most have low paying jobs and rely on credit cards to pay for school-related expenses. Advantages and disadvantages of credit cards will be looked at in the next section. Advantages include increasing consumer spending power and smoothing consumption. Hidden fees and costs and privacy problems concerning cardholders’ personal information will be addressed as disadvantages. Credit card fraud will be explored, with emphasis on stolen cards, identity theft, and counterfeit and altered cards, and abuses by telemarketers. As both internet commerce and credit fraud grow, people are becoming aware of the need for increased protective measures. Several methods for reducing fraud will be discussed, including initiatives taken by the government and several companies. Next, this paper will address the matter of who is responsible for the nation’s credit card debt problem. Consumers’ compulsive spending habits and the aggressive marketing schemes used by credit card companies will be focused on. The study will conclude with recommendations for an individual to follow when applying for a credit card. Areas that will be approached include determining beforehand what the interest rate will be, how the balance will be paid off, what the credit limit will be, and establishing the maximum number of card accounts to be open at one time. Literature Review Belcher (2004) addresses the rising problem of identity thieves targeting business records containing personal identification about employees. The author provides a number of suggestions for reducing the likelihood of workplace identity thefts and for protecting employees’ social security numbers. Brooker (2004) examines the creation of the credit card and how it has revolutionized American business. The author points out the impact credit cards have had on modern day businesses, such as FedEx, Wal-Mart, and eBay. The author also chronicles the environment in which purchases were made in past and considers how modern-day business would be if still cash-based. The mass mailing of credits cards during the 1960’s, beginning with the Fresno Drop of 1958, is discussed along with the ensuing fraud, credit delinquencies and massive bank losses. During the 1980’s and 1990’s, the card industry was transformed and experienced renewed success and unprecedented growth due to technological advances. Lastly, the author offers a look into the future at the possible replacement of card-based system by using cell phones or wireless chips for purchases. Bloch (2004) offers suggestions to internet retailers in protecting their online businesses from fraudulent credit card purchases. Recommendations are given to request sufficient customer identity data and to be aware of false email addresses and illegitimate shipping addresses. The author also advises to analyze log files to catch questionable orders, to be wary of overseas transactions in high risk regions, and to make anti-fraud policies visible to the customer. Feinberg (1996) conducts one study and four experiments, testing for the motivation to spend using credit cards in comparison to using cash. Results show individuals paying with credit were more likely to spend money, tended to spend a larger amount, and spend in a shorter period of time. Findings illustrate that credit card stimuli, such as posted card signias, can increase the probability and magnitude of spending and decrease the decision time involved. Garcia (1990) explores the history of credit card growth in this article. An assessment of selected previous research is given and an economic model of a rationed market is presented. Next, the author explores the effects credit cards have on social and economic variables, particularly consumption and the demand for money. Finally, credit cards’ role in the electronic money era is assessed, especially relating to issues of security and privacy. Medintz (1998) focuses on credit monitoring services in this article and gives both advantages and disadvantages of such. The author finds that few credit protection services are worth the cost, stating that the risk of private information being stolen on the internet is often overblown and consequences are not as severe as the credit monitoring agencies would lead consumers to believe. Aquino (2002) advocates that consumers should educate their selves before applying for a credit card and gives recommendations on how to use credit cards responsibly. Topics discussed include deciding how credit balances will be paid, number of cards to own, and how to calculate the average daily balance. Matthews and Slocum (1969) investigate the correlation between social class and credit card purchasing behavior. Results illustrate a significant relationship between credit card usage and consumer social class. Dumiak (2000) discusses the issue of security against credit card fraud on the internet, especially as e-commerce rises. The impact on advertising campaigns used by companies to address consumers’ concerns for increased security is also discussed. American Express’ Private Payments is singled out as an example of recent product developments to provide increased protection against fraud. Lenora (1991) focuses on using behavior to segment credit cardholders into four categories. Each segment is characterized according to several factors, such as the manner in which the balance is paid each month and the amount of monthly activity. Stanford (1999) provides a great portrayal of the marketing maneuvers of various credit card companies and their endeavors to reach untapped markets. It discusses the inundation of credit card advertising aimed at college students with predictable results. It also provides solid metrics on the average number of credit cards and debt upon graduation. Bozworth (1997) shows the tremendous increase in consumer debt and the fact that billions of dollars remain unused in the market. The author advocates the potential of a stalled economy as well as slow economic recoveries. The study breaks down the metrics of consumer debt into mortgage and household debt categories. Prather (1996) looks at debt growth in the 1980s through the 1990s. It gives a breakdown of the types of consumer debt and breaks down a survey into income brackets, to include detailed analysis of the various data ranges. It could have better explained the causes for use in various brackets. Hogarth (2002) explains consumer complaint resolution and the elasticity of the credit card market. Some pertinent information on the business dynamics of the credit card industry is provided. Cole (1998) gives a detailed bottom-up academic explanation of how the whole consumer credit process works from the overall economy to the actual credit approval process at a bank. The study provides very thorough and detailed reference on the whole system and infrastructure. What Constitutes Consumer Debt? The amount of household debt has increased dramatically over the last 24 years. Just as economists benchmark the increase in prices or property value against increases in income and cost of living, the increase in consumer household debt must be set against the increase in income. The increase over the last twenty years is not only in aggregate numbers but also as a ratio to the increase in income. Before discussing we elaborate on the actual numbers of this debt, we must address the issue of consumer debt classification. Of the numerous studies referenced for this paper, each uses a different set of criteria to measure household and consumer debt. One study found unclear distinctions of even the basic concept of credit versus debt definitions ( Bozworth, 1997). “Part of the difficulty in getting a clear picture of the actual debt load of households relates to the terminology, which is used in referring to various types of credit/debt.” (Bozworth, 1997). Debt was finally determined to be the amount a person owes. Credit is the potential lending available to a person, business or government. Consumer debt categories were the next issue. All of the studies generally agree household debt exists. Household debt consists of two sub-categories, consumer and mortgage debt. Mortgage debt is singular; however, consumer debt can be broken down into a myriad of categories to include credit card debt, home equity debt, educational loans, appliance payment plans etc. The sub-classifications vary in the scope because of the excess of potential consumer debt types available. Fortunately, there were three sub-classifications of consumer debt that were closely related. “Household debt is generally divided into two categories, mortgage debt and consumer debt. Consumer debt is defined as “non-business” debt used by consumers for purposes other than home mortgages.” (Prather, 1996). The definition of household debt seems to be fairly consistent amongst various sources. Again, looking at the tremendous debt explosion, this study will concentrate on consumer and credit card debt, even though the home equity credit market also exploded during the 1990s. This total increase in debt not only took place in North America, but also in Europe and the Pacific Rim. Korea recently exposed its debt bubble with consumer credit card debt reaching epic proportions. In North America, it seems that a large part of the economic growth during the 1980’s was financed by government as well as household debt. Consumer Credit Card Debt: A Growing Problem A large proportion of consumer debt is held in credit cards. During the 1980’s, consumer debt increased an average of 8.8 percent annually while credit card debt rose at a rate of 13.5 percent annually (Bozworth, 1997). Not only the amount of people holding cards increased, but the aggregate number of traditional credit cards issued increased as well as industry specific cards such as gas stations and retail outlets. The country felt the consequences of this debt excess during the recession of the early 1990’s. The trough of the business cycle was aggravated by the large amount of personal and business debts that came due and as a result bankruptcy and foreclosures increased significantly. As soon as the recession ended in 1992, the United States quickly recouped and began another cycle of rising consumer debt, particularly credit card debt. Once again, this increase helped fuel the economic growth period under the Clinton Administration from 1992–2000. During this phase of credit card growth, the credit card marketers found new markets for their cards, young college students. The population became even younger with middle class high school children receiving credit cards from their parents. Not only the age groups but also the number of credit cards increased. Consumers are increasingly using credit cards to pay for purchases. “More than 75% of the adult population in the United States has a credit card with an average of 4.2 cards per cardholder. Estimates show that by the year 2015, 80% of the adult population will hold a credit card. Between 1991 and 2001, consumers’ outstanding revolving credit grew from $247 billion to $700 billion” (Hogarth, 2002). This wave of consumer borrowing went unabated well into the 1990s. The typical consumer does not proactively predict troughs in the business cycle. When life is stable, they see no constraints on their income over the time horizon. This was the case during the 1990s. People thought the technology boom would never end, but by the end of the decade, the technology boom slowed just as some had predicted. All of a sudden an overabundance of high tech jobs evaporated. What made this trough in the business cycle even more pronounced were the record levels of consumer debt. This debt went into the trillions of dollars. The recession of early 2000 was difficult to weigh against the previous two periods because of the 2001 World Trade Center bombing in New York. This event caused massive economic upheaval and retarded the economic recovery taking place. The economy is just now pulling out of that business cycle trough, but not with the same momentum experienced during the 1990s recovery. The huge increase in all types of debt has not slowed at all. In fact, it has increased. Seemingly, after each trough in the business cycle the momentum of debt comes back even stronger than before. Robert Cole relays his concerns in the following paragraph, “Today we are facing ever more challenging debt levels….Mortgage foreclosures, credit card delinquencies and personal bankruptcies are all near record levels.” (Cole, 1988). Types of Credit Cards There are different types of credit cards available to consumers. One type is a bankcard, which is issued by a bank. Examples of such cards include VISA and MasterCard. Another type of credit card is a travel and entertainment (T&E) card. Examples include American Express and Diners Club card. Petroleum corporations, with their vertically integrated holdings of gas stations, also began mass-marketing gas cards. A forth type includes store cards that are only accepted at stores owned by a particular retail chain. Sears, Mervyn’s, Target, and Foley’s are some examples of store chains currently using this strategy. Another type of card that is also available to customers is called the affinity card. This card is one that carries the logo of an organization in addition to the emblem of the card. Card holders receive some sort of benefit by using the card, such as accumulating frequent flyer miles or points to be used toward merchandise in a catalog. The organization solicits all its members to get cards with the idea of keeping their name in front of the card user and keeping the card user loyal to them for future purchases. It is quite seldom that the organization receives anything out of these types of cards as most of the profits go to the cardholder. The credit card company wins as they give out more of their cards to users and the users win as they reap the benefits. Types of Credit Card Users Credit card companies segment cardholders into four categories characterized by their spending behavior. The four categories are 1) zero balance accounts, 2) non-revolving accounts, 3) attrition accounts, and 4) active or vibrant accounts. These categories have characteristics based on credit card usage and balance carried forth. The zero balance account is an account that does not carry a balance. These accounts are typically thought of as having no future revenue flow; however, that is not always true. A cardholder with this type of account is valuable to a credit card company for several reasons. First, at some earlier point in time the cardholder had replied to an offer, indicating that the company successfully reached the consumer. Therefore, the company has established an account relationship with this consumer and has obtained important information concerning the consumer, such as address and perhaps a phone number. Being a cardholder, the consumer is most likely familiar with the bank card institution. The consumer also may use the account without prompting on an infrequent basis. Additionally, the cardholder will probably respond to internal promotions and solicitations much more readily than non-customers. This type of account has potential to be upgraded with a higher credit line or to gold card status; downgraded to a lower credit line; cross-sold other bank products; and reissued plastic without direct permission from the customer (Lenora, 1991). The second type of account is a non-revolving account and is characterized when the holder pays his or her balance in full each month, thus avoiding interest charges (Lenora, 1991). The next type of account is called an attrition account. An attrition account is a non-zero, revolving account that is being paid as agreed. If this type of account goes through a 30-day grace period, or one cycle, without any activity it may be a sign that the cardholder is switching to a different company. The final category is the active account, also known as a vibrant account. An active account is the most profitable in the portfolio because it provides both interchange, through purchase volume, and interest income with non-zero balances and revolving status (Lenora, 1991). A more simplistic method for classifying credit card users is offered by Stauffer (2003). This method classifies cardholders into two types of users: the convenient users and the credit users. Convenient users are those who substitute card charges for available transaction balances and who pay off their balance within the grace period. These types of users often avoid interest charges and various fees and in the long run earn higher rates of return on their balances. In contrast, credit cardholders use their credit cards to increase their short run level of transactions and consumption above and beyond what their current level of monetary balance would normally allow. They in turn cannot pay off their balances and acquire more debt at higher rates of interest at the end of each month. Credit Card Holders Classified by Income The socio-economic class of a person has a key role to play in their purchasing power and how they view and use credit cards. Research has shown that membership in a social class has a direct influence on credit card usage. A census conducted by the US Census Bureau showed the usage of credit cards by different age groups and by different income groups. Table 1, shown below, presents this data. This study shows consumers’ credit card usage patterns according to age group and then according to income, which is an indicator of socio-economic class (US Census Bureau, 2003). Table 1: Usage of General Purpose Credit Cards by Families: 1992 to 20011 Median Having new a charges Having a Almost Age of family general on last balance Median always Hardly head and purpose Median month’s after last balance pay off Sometimes ever pay family credit number bills (in month’s (in the pay off the off the income2 card of cards US$) bills US$)3 balance balance balance 1992, total 62.4% 2 $100 52.6% $1,200 53.0% 19.6% 27.4% 1995, total 66.5 2 200 56.0 1,700 52.4 20.1 27.5 1998, total 67.5 2 200 54.7 2,000 53.8 19.3 26.9 2001, total 72.7 2 200 53.7 1,800 55.3 19.1 25.6 Under 35 years old 64.2 2 100 68.2 1,800 40.6 24.1 35.4 35 to 44 years old 76.9 2 200 62.9 2,000 47.0 22.8 30.2 45 to 54 years old 80.0 2 200 57.3 2,000 54.3 19.3 26.4 55 to 64 years old 76.0 2 300 48.2 2,000 59.8 17.8 22.3 65 to 74 years old 76.5 2 200 30.0 1,100 75.8 11.0 13.2 75 years old and over 59.7 2 200 24.2 700 81.2 9.3 9.4 INCOME Less than $10,000 28.5 1 - 67.4 1,000 45.3 23.0 31.7 $10,000 to $24,999 56.1 2 100 57.0 1,000 49.5 19.9 30.6 $25,000 to $49,999 76.1 2 100 61.3 1,700 46.7 19.7 33.6 $50,000 to $99,999 87.9 2 200 53.9 2,000 55.2 20.8 24.0 $100,000 and over 95.8 2 1,000 36.1 3,000 75.2 13.9 10.9 Source: Board of Governors of the Federal Reserve System, unpublished data. From Statistical Abstract of the United States, 2003. 1 General-purpose credit card include MasterCard, Visa, Optima, and Discover cards and exclude cards used only for business purposes. All dollar figures are given in constant 2001 dollars based on consumer price index data as published by U.S. Bureau of Labor Statistics. 2 Families include one-person units. 3 Among families having a balance. The lower portion of Table 1 distinguishes credit card holders by income levels. At the lowest income bracket are those users who make less than $10,000 ranging to those users who make $100,000 and over. In viewing the chart, it should be noted that 96% of consumers in the highest income bracket range ($100,000 and over) own at least one credit card. In contrast, less than 29% of consumers who earn less than $10,000 own a credit card. When looking at the percentage of individuals having a balance after the previous month’s bill, about 67% of those in the lower income bracket carried a balance over, compared to 36% of those in the highest income bracket. The different classes of people play a key role in how they use their credit cards. Those earning a higher income were more likely to pay off their balance or would almost always pay off their balance. These income classes of people are usually those who are in managerial positions. They are typically lawyers and doctors. These people use different means to satisfy their aims and they are generally responsible for decisions affecting other people (Matthew and Slocum, 1969). The consumers who make between $10,000 and $25,000 are those types of people who tend to be more practical and they tend to view the world with a pragmatic eye. They are usually small business owners and office workers. They usually think before they make any kind of moneymaking decisions. They try very hard to not be in debt and try to pay off their credit card bills but in many cases they are unable to do so based on their level of income and ability to pay their debt (Matthew and Slocum, 1969). The final group is comprised of those making less than $10,000. This group is typically concerned with immediate gratification. They usually have occupations that “require little skill and education, for example, taxi drivers, car washers, and janitors” (Matthew and Slocum, 1969). These users typically do not pay their bills at the end of the month and they are left with a balance that carries over from month to month. According to Matthew and Slocum’s study, these users are called installment users (1969). Matthews and Slocum’s study similarly explains credit card usage based on socio-economic class; however, they used different terms in explaining the various types of users (1969). They referred to users as either convenience or installment users. Convenience users are those that pay their credit card balance off on time, using credit cards as convenience tools to help them out when they are in a financial bind. Installment users are much different though. This type of user chooses to pay a portion of their credit card bill and pay interest charges on the remainder of the balance. According to Matthews and Slocum, the differences reflect respective social class value, which can be used as a basis for marketing credit service (1969). Credit Card Use by College Students One important group of people who have affected the usage of credit cards is college students. “The increased number and type of credit cards on university campuses has seen an explosive level of growth in the past decade, with most credit card companies targeting college students” (Joo, Grable and Bagwell, 2003). Today, college students have more access to credit cards than ever before. This trend is very disturbing as it illustrates the level of debt that many students will be in before they begin their lives as working adults. According to a study by one expert, the high level of debt that college students face may go beyond the future consequences suffered by individuals who did not go to college (Palmer, 2001). This is startling as many see education as the key to a brighter future. With credit card debt, many students are incurring more debt than individuals who do not have a college education. Stanford elaborates on this phenomenon with his study addressing student credit card debt. Interestingly, 49% of students have four or more credit cards with only 18% paying off their balance each month. Further, 33% of students use their credit card to pay for tuition. The article also indicates that 72% of students have more than just one card, while a whopping 13% had balances of $2000 and 26% had missed payments. Some of these individuals will graduate with an excess of $15,000 in outstanding credit card debt! Makes this figure even more disturbing was the 18-28% interest rates at the time of the article (Stanford, 1999). Schug reinforces this trend during his study of social studies. This study describes how college students “get in” over their heads, noting that college students have an average of three credit cards and already had a significant debt load, most likely due to student loans (Schug, 2002). Benefits of Credit Cards Credit cards offer a number of specific advantages to consumers, especially in comparison to using cash for transactions. Credit cards increase consumer spending power and convenience. Credit cards allow consumers to save money by permitting them to take advantage of sales, something that might not be possible if they had to rely solely on cash on hand. Credit cards can be used 24 hours a day to charge purchases by phone, mail, and over the internet. Thus, consumers need no longer be inconvenienced by the fact that most shops and malls close overnight. Those whose have limited mobility or are housebound are now able to shop. Credit cards are also accepted virtually anywhere in the world, whereas cash and checks cannot so easily cross national borders. For example, cardholders are able to travel from Paris to Rome on the spur of the moment in the middle of the night without worrying about whether they have Italian lira (Manning, 2000). Credit cards smooth out consumption by allowing consumers to make purchases even when their incomes are low. In the case of being laid off, a consumer can continue maintaining the same lifestyle, at least for a time with the anticipation that he or she will payoff credit card balances when called back to work. Individuals can make emergency purchases, such as for medicine, when they have no cash on hand. Credit cards allow consumers to do a better job of organizing their finances, because they are provided each month with a clear accounting of expenditures and of money due. Credit cards may yield itemized invoices of tax-deductible expenses, offering the convenience of systematic records at tax time. Credit cards allow cardholders to postpone paying a disputed bill while the credit card company investigates the transaction. Credit cards offer the option of paying the balance all at once or stretching payments out over a length of time. In the event that a consumer’s wallet or purse is stolen, credit cards offer more protections and recourse than cash and thus help to reduce cash-based crime (Feinberg, 1996). The most notable advantage of credit cards is that they permit consumers to spend more money than they have, thereby allowing the economy to function at a much higher and faster level than it might if it relied solely on cash and cash-based instruments. Credit cards also offer benefits for merchants. For example, merchants who accept credit cards are likely to receive more business they if they did not. And, unlike keeping cash in the store register, credit card receipts are not magnets for thieves (Feinberg, 1996). Disadvantages of Credit Cards Until 1989, credit card companies were allowed to mail solicitations to people without disclosing the costs involved. In other words, they were able to keep information concerning fees and other costs from consumers. Those who accepted the card offer would not find out about the costs until the card arrived or even until they began using it. However, in 1989 a Federal Reserve ruling required that henceforth such solicitations should reveal interest rates, fees, the grace period, and other pertinent information. It is fair to say that although this information is now being revealed to consumers, it remains a mystery to many of them. Many people find it difficult, if not impossible, to understand the terms of their credit card agreement. They are discouraged by the obscure and difficult wording, as well as the small print in which this information is printed (Block, 2004). The problem has been exacerbated by the fact that credit records have been treated in the past as secret and not readily available to the general public. Because the records have been confidential, credit users have not been able to correct errors in these reports. Unbeknown to them, they may have been turned down time after time for various things because of erroneous data in their credit records. Consumers must also be made aware that they have a right to see their credit records and to correct errors in them. Of course, the process requires great effort. Nonetheless, the veil of secrecy associated with credit reports is being lifted, at least to some degree. Yet most people are unaware of their rights or unwilling to avail themselves of them. The result is that for most people, their credit records remain a mystery (Garcia, 1990). Credit bureaus obtain lots of information about people through credit histories and credit checks, a good portion of it involving credit card use and abuse. Much of this information on purchases, payments, and non-payments is obtained from retailers, banks, and other businesses. Additional information is acquired from publicly available courthouse records on bankruptcies, tax liens, judgments, and foreclosures. Credit bureaus also track who has requested credit information on a person over the past two years (Lewis, 1990). Not only do the credit bureaus have information about us, but so do the banks and other companies that issue credit cards. Among other information, they know applicants’ payment history and current balances, how long they have had particular credit cards, their age, their estimated income, what they purchase with credit cards, and where they purchase it. The credit card companies also might have such personal information as number of children, value of car and home, and even some knowledge of hobbies (Medintz, 1998). We cannot rely on the credit bureaus to make sure every request for credit information is legitimate, if history is a guide. For example, private investigators have been able to gain credit information even though they have no legitimate need for it. Today, employers sometimes check a job applicant’s credit records for signs of stability, but under the Fair Credit Reporting Act, they are not supposed to do so without the applicant’s knowledge. Nevertheless, applicants have been turned down for jobs because of bad credit ratings without being told that their credit histories had been a factor in the decision (Manning, 2000). Another threat to consumer privacy stems from unauthorized break-ins by outsiders into the computer files of credit bureaus and other databases. At least some organizations rely on the growing “information broker” industry, in which insiders steal data from U. S. government computers and then sell that information to an array of customers. In the main, the data come from employees who have been bribed, some for as little as $50. Some data have been provided by employees at the FBI’s National Criminal Information Center, which has information on over 15 million arrests. From Social Security Administration records, an information broker can get employment histories and year-by-year salary information (Lewis, 1990). Credit bureaus are in business to provide information to a wide range of agencies, including lenders, financial institutions, utilities, financial service companies, marketers of various types, and life and health insurance companies. Privacy issues arise because credit bureaus and credit card companies have been known to sell information to others for an entirely different purpose than it was originally given and without the permission of the individuals involved. Credit Card Frauds The largest single source of losses due to credit card fraud is stolen cards. Individuals may have cards stolen from them directly, but the vast majority of credit card thefts involve the postal system. The most common type results from infiltration of, and robbery within, the post office. Other types of credit card theft involving the postal system include the looting of mailboxes primarily in apartment buildings, attacks on and thefts from mail carriers, and hijackings from the large post offices by well organized groups (Lewis, 1990). An increase in the questionable use of credit cards at gasoline stations may be linked to credit card theft. With in-pump terminals, consumers can use credit cards without having any contact with clerks. The terminals seem to have an unusually high incidence of what is termed “ghost transactions,” in which authorization is given for a credit card transaction and then cancelled without a purchase being made. It may be that many of these ghost transactions involve crooks that are testing out stolen cards on in-pump terminals before using them in places where the thieves may need to deal with clerks face to face (Medintz, 1998). Credit card scams are another factor that must be taken into consideration. Credit card scams have been on the rise in America. Identity theft is one of the greatest credit card scams that take place every day. Personal records have become increasingly accessible to many deceptive individuals. “In 2002, the federal government received 162,000 complaints regarding identity theft” (Belcher, 2004). Criminals could retrieve personal information from individuals by using any or all of the following schemes: they would get information on persons by stealing information from employers, they would sometimes hack into computers, steal credit or debit card numbers or simply stealing someone’s wallet or purse. When these criminals have this information they would then open a bank account with the personal information or would go on spending sprees. This type of credit card scam is the most predominant. Even though a credit card remains safely in one’s possession, fraud may still occur. For example, credit card numbers can be stolen by thieves rummaging through garbage for discarded credit card receipts; by dishonest store clerks, hotel receptionists, or airline employees who make duplicate imprints of a customer’s card; and by people who telephone “marks” to say that they have won a trip and to ask for a credit card account number for verification purposes. Another possibility is the submission by merchants of false or altered receipts to the credit card firms for payment. There have also been cases of computer hackers breaking into credit card files and either creating accounts or making charges on other people’s accounts. The practice employed in many stores of writing credit card numbers on checks as protection against bad checks leaves people open to yet another kind of fraud. Those who are able to obtain a copy of that check will have a name, address, phone number and credit card number. With such information, a criminal could easily open a charge account at a department store in the name of the person who wrote the check. Several states now have legislation that prohibits the practice of asking those who pay by check for a credit card number. Interestingly, there is no justification for writing credit card numbers on checks, because Visa and MasterCard will not allow stores to charge credit card accounts for the cost of purchases made with checks that ultimately bounce (Manning, 2000). Another way to steal credit information involves computer theft from the database of a credit reporting agency. In one case, in a few minutes a thief purloined a great deal of information about one individual, including past addresses and employers, Social Security number, credit card numbers, mortgage information, bank accounts and any other personal data that appear on credit reports. Counterfeiting generally involves the unauthorized manufacture of credit cards. Hong Kong is believed to be the current center of such counterfeiting. Counterfeiters may also heat stolen cards to flatten the names and account numbers and then re-emboss them. Credit cards may also be altered by shaving off, rearranging, and gluing numbers or letters back onto a card or by altering the signature strip. Or counterfeiters may replicate the hologram, the three-dimensional laser-created image that appears on the face of many credit cards. Holograms were introduced in 1985 by Visa and MasterCard to reduce fraud, and they had some initial success in reducing the danger posed by counterfeiting. However, the counterfeiters soon obtained their own lasers and began copying the holograms (Lewis, 1990). A related type of fraud is “skimming,” or alteration, of the strip of magnetic tape on the back of the cards. The use of magnetic tape is traceable to the late 1960s, but its utilization exploded in the 1980s after it was adopted by the major American credit cards. In skimming, encoded data are transferred from a genuine strip of magnetic tape to a fraudulent one. Fraudulent applications occur when falsified information leads to the issuance of a credit card. For example, an applicant might use a false name, address, or income information to obtain a card. In fact, fraudulent applications are the banking industry’s biggest headache today (Medintz, 1998). The credit card companies are particularly concerned about increasing fraud by telemarketing companies. In the most common form of-telemarketing fraud, the telemarketers obtain the names and credit card numbers of cardholders. They may then call the customers and interpret any expression of interest during the telephone conversation as permission to charge a purchase. In one case, representatives of a travel club called people to offer them trial memberships. Those who did not hang up were told that the club already had their credit card numbers and, for “convenience,” would simply charge the fees to their accounts. The slightest hint of interest led to charges (Manning, 2000). A variation of this type of fraudulent activity involves the “laundering,” also referred to as factoring, of drafts. For example, a legitimate credit card merchant submits illegitimate charge slips commingled with legitimate slips to the credit card firm on behalf of an illegitimate telemarketer. In return, the merchant gets a portion of the illegal gain, which can be 10% or more. This scam works because credit card companies are more likely to accept a charge when it does not come from a known illegitimate telemarketer. In this case, the credit card firms often end up absorbing the chargeback when the telemarketers go out of business or simply disappear. Another scheme is for telemarketers to use middlemen to approach merchants about laundering receipts, thereby making it more difficult to track down the culprits. In still another development, illegitimate telemarketers use a number of different merchants to launder charges, thereby making it harder for the sophisticated computer programs of the credit card companies to discover that anything out of the ordinary is occurring (Manning, 2000). Taking Action to Reduce Fraud Most of the existing strategies against fraud protect the credit card industry and the merchants that accept credit cards. However, there are many ways consumers can protect themselves, as well as ways government and the credit card industry can minimize abuses of card users (Brooker, 2004). Credit card firms and the invaluable merchants that accept their cards have several means of defense against fraud, including the following: asking for identification, verifying the signature on the back of the card, verifying that the embossed account number on the front of the card matches the number printed on the back, checking the cardholder’s photograph on the front of the card, encrypted code, encoded physical information, smart card, card issuer’s Clearinghouse Service, computerized system for detecting fraud, and card activation. Other innovations are likely to emerge in the coming years. Keep in mind, however, that because overall losses due to fraud are low in comparison to the total number of cards in existence and the total dollar amount of credit card business, all these efforts are aimed mainly at protecting the integrity of the industry. They do little to protect consumers from personal losses due to fraud (Lewis, 1990). There are a number of steps consumers can take to decrease their risk of becoming victims of credit card fraud. At home, individuals should make certain their mailboxes are secure against tampering and remove mail as soon as possible. Credit card receipts and other documents displaying credit card numbers should be shredded before being discarded in the trash. When entering pin numbers and credit card numbers, consumers should guard against “shoulder surfers” who might be watching too closely. Also, consumers should not allow clerks to write their credit card numbers on checks or to write their telephone number or address on credit card receipts (Manning, 2000). It is advisable for consumers to get copies of their credit reports from the three major credit agencies: Equifax, Trans Union, and Experian. Ultimately, the credit agencies must take more responsibility for preventing errors from creeping into records and for eliminating them once they are in the records. However, one cannot expect the credit bureaus to take the lead in reforming themselves. Consumer groups and especially the government must play an important role in this process (Irving, 1997). American Express has a line of products called Private Payments, in which customers are assigned a new number to use for each specific purpose. This system allows consumers to buy without transmitting their real account numbers over the internet (Dumiak, 2000). Alfred E. Kelly, group president of United States Consumer and Small Business Services for American Express announced, “The launch of our new privacy and security products demonstrates our unwavering commitment to our customers and our ability to provide innovative responses to the needs and concerns of the 21st century” (Dumiak, 2000). This is done in attempt to ease consumers’ concerns about using their credit cards over the internet. Gary Heatherington, CEO of Cyota, believes that increased security will help companies gain their customers’ trust. “We all see projections that show significant growth in e-commerce over the next few years,” he says, “What’s holding that back? In part, it’s the fact that people are scared to use their cards on the internet” (Dumiak, 2000). The federal, state and local governments have taken steps to protect consumers, but far more could be done. One of the most important things the government could do is to put a cap on excessively high interest rates. However, most government efforts to control the industry and put a ceiling on interest rates have been thwarted (Irving, 1997). Another congressional effort to deal with the troubling policies of the credit card firms is the Credit and Charge Card Disclosure and Interest Rate Amendment. This amendment to the Truth-in-Lending Act requires companies that issue credit cards to carry out the following: disclose on monthly statements a running total of all payments; give a year-to-date breakdown of interest and fees; and calculate the number of months it will take to payoff the balance if only the minimum amount is paid each month. The main objective of this bill is to educate consumers about the long-term implications of making only the minimum payment required by the card companies. However, it is in the interest of the credit card firms to encourage minimum payments, because a large proportion of their profits come from interest on unpaid balances (Irving, 1997). Who is Responsible for the Credit Card Debt Problem? Part of the responsibility certainly lies with consumers and unrestrained consumption is a huge factor. People who say they are continually unable to control the urge to buy despite the overwhelming burden of debt may be classified as compulsive consumers. The analogies between debt and shopping addiction and addictions to alcohol and cocaine seem appropriate. Although compulsive spending existed before credit cards and exists among those who do not use credit cards, credit cards seem to exacerbate the problem (Block, 2004). Credit card firms and their aggressive marketing tactics are also partially responsible for the nation’s credit card debt problem. The companies make innumerable telephone calls and send out tons of mailings offering free cards, high credit limits, and low introductory interest rates. Banks and other credit card merchants constantly seek new ways to encourage people to use credit for purchases, for example, by charging their supermarket purchases. Banks, in particular, have spent billions of dollars encouraging people to go deeply into debt on their credit cards. Banks are eager to distribute as many cards as possible because of the huge profits associated with the credit card business (Manning, 2000). Before Applying for a Credit Card There are many things to think about and questions you need to ask yourself when applying for a credit card. Whether it is your first credit card, an additional card, or a replacement for a higher interest card, you will benefit from doing a little research and knowing what you want and what to look for. It is important to choose wisely because in the end it determines whether that card provides convenience and value or serves as more a burden to the consumer (Aquino, 2002). When applying for a credit card, ask a representative for more information or refer to the company’s website for more details and features of the credit card. The first thing to ask is if there are any application, processing, or annual fees. One of the most important questions to ask is what will the interest rate is if the balance is not paid in full before the due date? Next, it is important to make a decision as to whether you are going to pay the monthly bill in full or in installments. As Aquino states, “If you always pay your monthly bill in full, the best type of card is probably one that has no yearly fee and has a solid grace period before finance charges are applied” (2002). Paying the credit card bill in full every month is very smart because it saves a lot of money. If you do not pay in full and instead pay the minimum amount due, then it is important to know how the interest is applied to your balance. “Most credit cards apply the financial charge on your ‘average daily balance,’ which is calculated by taking the amount of debt you had in your account each day during the billing statement period and averaging it” (Aquino, 2002). The number of credit cards you own depends on your lifestyle, buy Zeny M. P. Iglesias, the Vice President for External Affairs of Standard Chartered Bank of the Philippines, suggests only owning two credit cards (Aquino, 2002). People consolidate their credit card debt to reduce their interest rate or to lengthen the term of the loan. Shifting balances from one card to another is not going to lengthen the loan term because credit card debt is revolving credit. However, “a balance transfer to another credit card at a lower interest rate could help you pay down your balances faster because more of your monthly payment would be going towards principal instead of finance charges” (Aquino, 2002). Another issue to consider is the credit limit on the card. A good credit card does not have to have a high credit limit. In fact, you could be putting your entire credit at risk if your credit limit is higher than you can really handle.The final thing to consider is not to apply for too many cards. Multiple inquiries make you seem desperate and this can scare creditors (Aquino, 2002). SUMMARY AND CONCLUSION Briefly summarizing the findings from the analysis, credit card use is soaring, a condition only encouraged by technological advances and societal demands for convenience. However, as credit card use increases, so do related problems such as debt and fraud. The U.S. Census Bureau study found that higher income individuals are more likely than lower income individuals to possess multiple credit cards and are less likely to carry a balance to the following month. Students seem to be one of the groups most prone to use and mismanagement of credit cards. It is addressed that the majority own multiple cards, few pay off their balances each month and a significant number have missed payments, practices driven by the reality that most work low paying jobs and rely on credit cards to pay for their school-related expenses. The paper discussed several advantages of credit card use, such as increases consumer spending power and smoothes consumption and disadvantages, including hidden fees and costs and privacy problems concerning cardholders’ personal information. The issue of credit card fraud was talked about, with emphasis on stolen cards, identity theft, counterfeiting, and abuses by telemarketers, as well as several methods for reducing fraud. This study found the nation’s credit card debt problem can be attributed to consumer spending behaviors and aggressive marketing tactics. The concluding section addressed recommendations for an individual to follow when applying for a credit card, such as determining beforehand what the interest rate will be, how the balance will be paid off, what the credit limit will be, and establishing the maximum number of card accounts to be open at one time. REFERENCES Aquino, N.P. (2002, Nov 25). Are you thinking of applying for a credit card? 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