Cash is dying. Long live plastic. Love them or hate them, you probably can’t do without them. In 2012, the total value of credit card transactions in the U.S. alone was $2.48 trillion. In the same year, two-thirds of all in-person sales were made with plastic, while only 27% were made with cash.
Credit cards are everywhere. They are used to buy just about anything, and they are here to stay. So it’s smart to learn a little about how they work. Here are 20 surprising facts you didn’t know about credit cards.
Your credit card doesn’t really have an expiration date.
Yes, I know it says so on your card, but you could continue using it after the expiration date. Ever notice how the number on your replacement card is the same? The expiration date on your card fills two main purposes. First, it is an estimate of the lifetime of your credit card and gives your credit card issuer a date to send you a new card. Second, it is used for online and over-the-phone purchases when the merchant cannot see your card. Asking for the expiration date allows the merchant to confirm you are the owner of the card and have it in your possession.
There are enough credit cards in circulation to span the earth over 3.5 times.
According to the financial reports of the three largest credit card companies in the world, there were over 1,635 million cards in circulation in 2013: Visa had 800 million, MasterCard had 731 million, and American Express had 104 million. If you placed all those cards side by side, you could span 86,981 miles: the equivalent of three and a half trips around the world.
The largest private antitrust settlement in history was over credit card fees.
In December 2013, U.S. District Judge John Gleeson approved a $5.7 billion over MasterCard and Visa swipe fees. The initial settlement was higher, $7.2 billion, but it shrunk down to a measly $5.7 billion when 8,000 merchants – including Amazon and Wal-Mart – chose to drop out of the deal.
The second largest antitrust settlement was also over credit card fees.
The second largest antitrust settlement ($3.7 billion), was also over Visa and Master Card fees. For a great read on how this landmark case ended the monopoly the Visa and MasterCard credit cartel had on retailers, read “Priceless,” which was written by Lloyd Constantine: the very lawyer who represented the group of merchants (which included Sears!) during the court case.
Sears is one of the founding fathers of plastic.
It is hard to believe now, but Sears was once American’s golden retailer. The arrival of Sears catalogue was a special day in many households and the Christmas catalogue was what children’s dreams were made of.
According to Charles R. Geisst’s book, “Collateral Damaged: The Marketing of Consumer Debt to America,” Sears devised the first retail store card back in 1911. The card continued in service until 2003, when Citigroup bought Sears’ card and its membership list. Sears also launched the Discover Card. It was announced during the 1986 Super Bowl. That was one year before American Express launched its first credit card, when MasterCard and Visa controlled the entire credit card business.
The first credit card could only be used in New York restaurants.
In 1950, Frank McNamara, head of Hamilton Credit Corporation, founded the Diners’ Club Card: the first card that could be used in multiple locations. He had the epiphany of starting a credit card company after a business meal at the Major’s Cabin Grill, a popular New York restaurant. Before going to the restaurant, he had changed suits and left his wallet in his other suit (that was his excuse anyway). When he realized he had forgotten his wallet, he though about how useful it would be to have a card you could use instead of cash.
I know it doesn’t make sense. He would have been in the same pickle even if he had owned a credit card because it would have been in his wallet, but that’s how the story goes. In any case, Diners Club card was an instant hit. Although it could only be used at 28 restaurants and two hotels, it became a status symbol among the New York’s business elite, and grew to 10,000 members within the first year.
The creator of the first credit card thought credit cards were just a fad.
Although McNamara had the vision to see how convenient credit cards could be, he still thought credit cards would be just another fad. He sold his share in Diners Club for $200,000 – the equivalent of $1.6 million in today’s money. By the mid-1960s, Diners Club had 1.3 million cardholders and was accepted throughout the world.
The first general-purpose credit card was sent as junk mail.
In 1958, Joseph P. Williams, a Bank of America employee, had the bright idea of mailing 60,000 genuine BankAmericard credit cards to people in Fresno, California. The cards, which were made of paper and had a preapproved credit limit of $300, were totally unsolicited. By October 1959, Williams had managed to distribute 2 million credit cards to people all over California. Unfortunately for Williams and Bank of America, 20% of all credit accounts became delinquent, which meant Bank of America lost $8.8 million during the launch of the new card and Williams lost his job. Today, mailing unsolicited credit cards is illegal, although sending pre-approved applications is just fine.
Credit card companies spent around $80 to acquire you as a customer.
Credit cards spend an average of $80 in marketing and administrative costs to acquire every new customer, according to a 2014 report by the Database Marketing Institute. As long as customers keep their cards, credit card companies don’t mind. Every customer provides an average return of $120 a year.
In 2012, 40% of households depended on their credit cards to pay for basic living expenses.
You already knew Americans are addicted to credit cards, but you probably didn’t know quite how dependent we are on plastic. According to Demos’ 2012 National Survey on Credit Card Debt of Low-to Middle-Income Households, 40% of households used their credit card to pay for rent, mortgage bills, utilities, insurance and groceries. Not because they wanted to earn points but because they didn’t have enough cash to pay for basic living expenses.
Standard credit card interest rates are illegal in most states.
State usury laws limit the maximum interest rate a financial institution can charge. For instance, in Alabama it is 6%, in California it is 7%, and in New York it is 16%. However, thanks to the 1978 Supreme Court ruling on Marquette National Bank of Minneapolis vs. First of Omaha Services Corp, state usury laws don’t apply to national banks.
Credit card companies place their headquarters in states with lax usury laws.
The Supreme Court ruling on the Marquette National Bank of Minneapolis vs. First of Omaha Services Corp case allowed banks to charge their customers the interest rates allowed in the states where the banks had their headquarters. You know what happened. Credit card companies felt the sudden need to move their headquarters to states with extremely lax usury laws. Which is why Citibank has its headquarters in South Dakota (36% interest rate cap), Capital One is in Virginia (no cap), and Bank of America, Morgan Stanley, and HSBC are in Delaware (no cap).
Your maximum liability for unauthorized credit card use is $50 per card.
The Fair Credit Billing Act, or FCBA, sets a limit of $50 on your liability for unauthorized use of your credit cards, regardless of how much thieves steal from your account. It gets even better. If the fraudulent transactions are charged after you report your card stolen or lost, you are not even responsible for the $50. However, if your debit card is stolen and you don’t report it immediately, you are screwed.
Women are more likely to pay late fees and carry a balance on their credit card.
According to a 2012 report by the FINRA Investor Education Foundation, women are more likely to engage in costly credit card behaviors, such as carry a balance on their card, incur late fees, and make only the minimum payment on their balance. The same study reported that women consistently scored lower than men in financial literacy. When only men and women with high financial literacy were surveyed, the gender gap disappeared.
The first two digits on your credit card identification number identify the type of industry that issued the card.
If your credit card number starts with a 1 or a 2, it was issued by an airline. Number 3 is for companies in the travel and entertainment industry; all American Express and Diners Club cards start with a 3. Numbers 4 and 5 are for banking institutions. If it starts with a 4, you have a Visa card. Number 5 is for MasterCard. Number 6 is for merchandising and banking; 7 is for gas cards; 8 is for telecommunication companies; and 9 is used for national assignments.
If your credit card company decides to increase your credit card’s interest rate, you can say no.
Credit card companies don’t advertise this, but under the Credit Card Accountability and Disclosure Act, also known as CARD Act, you have the right of refusing to pay a higher APR. Ask them nicely and they might agree to keep the old interest rate, but make sure you get that agreement in writings. A more probable outcome, however, is that your credit card provider will lower your line of credit, hike your monthly minimum payments, or just cancel your credit card. Even if your credit card gets cancelled, you still get a minimum of 5 years to pay off your balance at the old rate.
You can validate a credit card just by adding it’s numbers.
By following the Luhn algorithm, a simple checksum you can easily check a credit card number is valid. This is how it works. Starting from the right, double every other digit on your credit card. Now, add the doubled digits to the ones you didn’t double. Note that if you have a double digit number such as 15, you must use the sum of its digits. For instance, 15 is 1+5=6. If the total sum is divisible by 10, it is a valid number. This method only protects against accidental errors, such as transposing the order of the numbers when reading them out over the phone. It was not designed to protect against sophisticated criminal attacks.
Forty percent of all financial fraud is related to plastic.
According to a 2013 report by LexisNexis, 40% of overall losses to fraud were directly associated with credit card and debit card products. In 2012, there were 12.6 million victims and $21 billion in total fraud, so credit card fraud was a pretty good business to be in, in 2012.
Farmers started our addiction to credit and credit cards.
Farming communities in the late 19th and early 20th centuries relied on the credit extended by the local general store because of the seasonal nature of their income. The more a community was centered on farming, the more they depended on credit. The store manager would record the amount customers owed on a ledger. As populations grew, keeping a record of customers’ accounts became harder. Stores would give customers credit cards, which at first were made of cardboard, as a way of identifying their account.
The average US household credit card debt in 2013 was $15,191.
Sadly, many indebted households can only afford to make minimum payments on their credit card balance. Assuming a credit card interest rate of 15.24% (average for 2013) and a minimum payment of 2%, the average household would take over 30 years to pay its debt. By the time the balance is paid off, the total amount paid — including interest — will be $39,756.
Ok, that last fact wasn’t that surprising, but it it should be shocking that American households are spending that kind of dough on high-interest loans. The sad thing is that many of the costs associated with credit cards are avoidable when you understand how credit cards work. According to a study by University of Nebraska researchers, Sall Allgood and William Walstad, low financial literacy is an excellent predictor of whether consumers engage in costly credit card use practices, such as not paying a credit card balance in full, only making minimum payments, and exceeding an account’s credit limit.
Ok, that wasn’t surprising either. What was surprising from Allgood and Walstad’s research is that perceived financial literacy, the level of financial literacy we think we have, was an even better predictor of credit card usage practices than actual financial literacy. In other words, people who thought they had a high level of financial literacy — but didn’t — were better at using their credit cards than those who had the same low-level of financial literacy and knew it. I’m not sure what that means, but it sure is surprising.