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Credit Cards

Overview

A credit card is a special type of structured account which combines a payment system and credit.  The account is separate from one's main bank (current) account, and may, in fact be provided by a different bank.

Many people prefer to get all banking services from one bank - the Financial Regulator urges people to shop around, and publishes independent surveys on credit cards on www.nca.ie

Applying for a credit card is a matter of filling out a form.  The bank will conduct their assessment, a major component of which is credit scoring.  If you have defaulted on credit in the past, then it's hardly worthwhile applying.  But most applicants are passed, and get a shiny new card, accompanied by some literature, including Terms and Conditions which you should attempt to understand.

Credit cards issued in Ireland carry the Mastercard or Visa brands in addition to the brand of the bank which issued the card. Visa and Mastercard are financial organisations owned by their member banks and provide services which ensure that cards branded with their logos are accepted worldwide.  So Mastercard and Visa ensure the acceptability and operation of the payment aspects of the card, while your bank provides the credit services on the card. 

Credit cards are by far the most universally accepted product of the financial industry worldwide. Some cards additionally carry affinity branding of a shared interest grouping such as a university or charity.  Readers are advised to check how much is actually paid to the charity or university in such cases.

The banking industry has multiple sources of income from credit cards:-

  • The cardholder may be required to pay an annual fee for the credit card, regardless of how much it is used,
  • The cardholder will be required to pay interest on outstanding balances not cleared within the period specified on the statement
  • The cardholder will be required to pay a fee for cash withdrawals.  This charge may be waived if the account is put in credit, and is still in credit after the transaction.  This facility may be useful to avoid carrying large amounts of cash while on holidays
  • The cardholder may be required to pay charges and/or foreign exchange margins on non-euro transactions.
  • The retailer will be required to pay charges related to the value of transactions.  Such charges are frequently  more than 1%, and are negotiated between retailers and card acquiring banks.  The charge for online retailers may be considerably higher, reflecting the risk associated with such transactions

Accordingly, in normal economic conditions, the credit-card business is usually a highly profitable business for the banks involved.

Having said that, a credit card can be a very useful, low-cost financial instrument. It provides up to 55 days of free credit, if statements are paid in full by the due date. There are no transaction charges to the cardholder for purchase transactions. There are no cash withdrawal charges if the account is in credit. This can be useful when travelling abroad - instead of carrying cash, put the cash into your credit card account, and withdraw it at almost any ATM around the world.

Overall, when one examines the credit card business, one cannot but be struck by the cynicism of the product design.  Essentially, it gives free credit to the more affluent members of society who can afford to clear balances, and charges high rates to the financially challenged who cannot.  It robs poor Peter to pay wealthy Paul. 

For more details on credit cards worldwide click here

The credit card

The physical characteristics (size, shape, thickness, etc.) are defined by international standard ISO 7813.  There is probably no other standard which has greater worldwide acceptance, and the standard is now used for most other banking cards around the world, as well as for many non-financial applications.  See "How credit cards are made"

The credit card primarilary serves the means of identification of the account to which a purchase should be charged.  The transaction is then authorised by the cardholder by other means (signature, PIN, or online, or other means as appropriate.

Credit cards issued in Ireland now carry an EMV chip.  (EMV is an acronym for Europay, Mastercard, Visa, the three organisations who originally co-operated to develop the chip - Europay has now been absorbed into Mastercard).  The EMV chip is an essential part of the Chip & Pin strategy for security on credit cards.  The chip carries the essential identification information on the account, as well as mechanisms to authenticate the card as a unique original.  EMV is therefore a significant fraud reduction device.  The EMV chip has capacity for a range of functions including identification of multiple accounts, stored value cards, and ticketing systems.  However, to date, none of these applications have been used on credit cards in Ireland.  EMV terminals are required to satisfactorily exploit the benefits of EMV, and EMV terminals have been installed in most retail outlets in Ireland, and some EU countries.  Significantly, EMV has not been widely adopted in the USA.  Accordingly, to accept US cards, old-type magnetic stripe terminals will also be maintained for many years.

On the obverse side of the card is the magnetic stripe, which also carries the account identification information.  Contrary to popular belief, the magnetic stripe is very robust, as has been proved by Discovery Channel's Mythbusters.

On the obverse side is the signature panel.  As the technical requirements of the card become more advanced, it appears that the space for signature gets smaller.  The signature panel has some security features. The card should be signed as soon as possible after acceptance.  A retailer who accepts a card on the identity of a signature should compare the signature presented with the signature on the card.

Also on the obverse side is the CVV (Card Verification Value) also called the CSC (Card Security Code).  This code is the last three figures of a string of digits printed on the signature panel on the back of the card.  The CVV will often be requested for "cardholder not present" transactions including internet transactions, to prove that the purchaser is not just providing a card number from a list of cardnumbers.

When you get a new card, it is important to read the accompanying literature.  In particular, there may be specific procedures which are required to activate the card before first use.  These should be followed closely.

The credit card account and statement

The style and layout of the credit card account differs from other bank accounts, because the normal usage pattern of the credit card differs from other accounts.  Other bank accounts give equal prominence to debits and credits. Other bank accounts do not show credit limits.  Credit card accounts show credit limits.  Credit card accounts are normally  dominated by purchases (debits).  And the credit card statement style and layout reflects this pattern

Credit card accounts typically operate on a monthly cycle, with a monthly statement, one lodgment per month, and multiple purchases.  The account shows a list of purchases which have been charged to the account over a period of a month prior to the statement.  It then shows a summary account of the debits and credits for the month (including interest if any), and a minimum amount which the cardholder is expected to pay.  The cardholder may choose to pay any amount, not less than the minimum.

If the cardholder pays the full amount outstanding within the specified period, then no interest will apply

If the cardholder does not pay the full amount within the specified period, then interest will be charged to the account in the next month (some of the interest may be retrospective).

If the cardholder pays less than the minimum amount, then additional interest may be applied, and other proceedings may arise as specified in the terms and conditions.

Click for further information on credit, credit limits, interest on credit cards.

Some banks provide online access to credit card accounts.  Such online services are generally not as comprehensive as the equivalent online services for current accounts.  In particular, online credit card statements are normally not fully up-to-date; they normally show the position at the end of the previous business day.  When you transfer funds online from your current account to your credit card account (in Bank of Ireland), you can see that the funds have been removed from the current account - but you cannot see the funds in your credit card account.  However, the funds will correctly show the next time the account is updated.

Buying with a credit card over the counter.

Take great care of your credit card.  Where possible, you should not let it out of your sight.  Increasingly, retail terminals are designed to facilitate conducting the transaction on the counter, and in many cases, the terminal is designed so that the cardholder himself inserts the card in a slot.

If payments are made using your card, and you are adjudged to have been careless or negligent, in such a manner that you have facilitated usage of your card and/or your PIN, then you are likely to be held liable.

It is salutary to know that many abuses of cards are perpetrated by family members of the cardholder.

You will be asked to key in a PIN number or sign a docket - either of the above are accepted as authorisation of the transaction. Increasingly, retailers will insist on PIN authorisation, as failure to do so will progressively increase their liability for frauds perpetrated.

From 17th March 2007, all transactions by Irish cardholders purchasing from Irish retailers require use of the PIN code (there is a small number of exceptions. See www.chipandpin.ie for details.

When keying in the PIN number, one should ensure that the number cannot be seen by prying eyes.  Accordingly, you should develop a technique of shielding the pinpad with one hand while keying in with the other.  You should be conscious of others in the queue as well as of those behind the counter.  Personally, I am also conscious of security cameras which in some major shores are placed at or over tills - these may give an opportunity to unscrupulous security personnel to record and playback your finger movements.

In the UK, there are certain circumstances in which the bank which issued the card may be held jointly liable with the retailer in relation to the goods or services purchased.  There is no such liability in Ireland.  The payment transaction is completely separate from the contract between customer and retailer in relation to the goods/services.  However, some banks do offer purchase protection insurance as an optional extra - and the terms of such insurance will be provided by that bank to the cardholder.

All large transactions and many small ones will be referred by the retailers terminal to your bank for decision.  If the transaction causes your account to exceed the credit limit, (and any tolerance above it which your bank may permit), then the transaction will be rejected by your bank, and the retailer will be informed that the transaction is not authorised.

Buying with a credit card online

Ireland has an exceptionally high usage of credit cards for purchase of airline tickets, thanks, in particular, to Ryanair.  Dell computers are also particularly successful as online retailers using credit cards. And the online business increases by a major factor every year.

Credit cards were never designed for online purchasing - they were designed for face-to-face purchasing over the counter.  And so the security levels attached to online purchasing do not come close to those involved in over-the-counter.  There are always risks - both for the buyer and seller.  So each one should take a range of precautions.

For buyers:-

  • Always check your statement for unauthorised transactions.  Report them quickly if you see them.
  • As far as possible, only purchase from websites you know and trust
  • In particular, never buy from a website which you have clicked in response to an unsolicited email - no matter how tempting the offer.
  • Use a trusted payment intermediary where possible.  Paypal is an example of a payment intermediary

Using a credit card abroad

Credit cards are internationally acceptable. No other means of payment is so widely accepted.  Very occasionally, you may be required to show additional evidence of identity in certain countries.  The Scandanavian and Baltic countries seem to be particular examples.

This does not mean that every retailer accepts credit cards.  There are rare exceptions.  This author has experienced major restaurants in Austria and Germany who would not accept credit cards; and restaurants usually cater for visitors.  Try then, to buy an item not normally bought by tourists in these countries, and there is an even higher probability of rejection.

Before going abroad

  • Check the expiry date on your card.
  • Key in the phone number for reporting a lost card to your mobile phone so you can report it quickly if your card goes missing. This is usually on the back of your credit card.
  • Don’t write down your PIN number - but make sure that you know it.

In a euro country

  • Under Regulation 2560/2001/eu, charges by your bank for credit card transactions in denominated in euro and undertaken in the EU should be the same for other countries as for your home country.
  • From 2008, the legal basis for credit card transactions should be synchronised in these countries.
  • You should retain the credit card receipts for all transactions.

In a non-euro country (including UK)

  • You may be asked by the retailer if you want to have the transaction converted to euro by the retailer ("dynamic currency conversion").  Our experience is that even the most reputable stores use poor conversion rates for such conversion.  In other words, they make a further profit from the conversion.  Our advice is that the transaction should be presented in the currency of the country of the transaction. (UK transactions should be presented in Sterling, US transactions should be presented in $, and the conversion should be done by your own bank).
  • A transaction charge of 1.75%-2% will be applied by your bank (a minimum charge may also apply)

Borrowing cash

You can obtain a "cash advance" on your credit card.  This can be done by withdrawing cash through an ATM (Note that ATMs have limits on the amount that they will pay in a single day) or from the cashier in your bank.  One credit card company also provides cheques drawn on the credit card account - these are another way of drawing down an advance.

Assuming that the account is not in credit, then charges will apply - typical charges are 1.5% but subject to a minimum charge.  This charge includes interest up to the due date as shown on the credit card statement. For a survey of such charges see www.nca.ie

Transferring to a different card

All credit card issuers advertise "attractive" terms if you transfer, and the bigger the balance, the more attractive.  Why! Because the biggest profits are made from such people. 

If you have a large balance on your credit card and are considering transferring, you should consider other options.  Firstly, you probably need to re-examine your lifestyle - are you spending more than you can afford.  Secondly, you should consider a term loan - it offers lower interest rates and a more disciplined form of repayments.

Enough of the lecturing! - let us suppose that you have made a decision to transfer.  Now lets look at what happens.

The new bank may offer a low rate for say 6 months on balance transfers.  You have a balance of say €5000, and are spending say €1000 each month on the card, and repaying €1075 each month, so that the balance stays at about €5000.  So you think that you will have little or no interest in that 6 months.  Now read the small print.  Every purchase you make is in effect considered as a new loan; every repayment which you make is considered as firstly paying the interest, and the rest of the repayment is considered as repayment of the balance.  So after one month, your interest is calculated at the balance transfer rate on €4000, and at the (higher) normal rate on €1000.  By the 3rd month, more than half of your balance is charged at the higher rate, and by the 5th month, all is charged at the higher rate.  The result is that you have reduced your interest bill - but not as much as you might expect.

Some banks may also offer a special rate on purchases for a specified period.  At the time of writing, one bank offers a rate of 0% for 6 months for both balances transferred and new purchases.

Of course, you can transfer again, and again, and again, so that you always have some reduced rate.  Better to find another way to straighten out your finances.

Stamp duty

If you are switching credit card, make sure you close your old credit card account. Remember that you have to pay stamp duty before you close your old credit card account. Ask your old credit card issuer for a Letter of Closure, which proves that you paid the stamp duty for that year. Give this letter to your new credit card issuer as soon as possible so they do not charge you stamp duty again.

Remember, if you don't close your old credit card, then you will be charged €30 stamp duty twice.

Credit and credit limits

Many commentators seem to consider that credit arises only when the cardholder does not pay each statement in full within the prescribed period.  In fact virtually all card purchases are done on credit - some cardholders pay interest on their credit, others do not.

Overall, the strong message in our advice is that you should not borrow using your credit card if possible...... the one exception which we would recommend is that if you need funds for a short period (a month or two) then credit card funding may be cheaper, and is simple to avail of.  But make sure you pay it off then.

You are assigned a credit limit by your bank and this limit is normally shown on your statement.  If you read the small print, you will find that breaching credit limits can have serious consequences.  You may, for example, be surprised to learn that you may have agreed in the small print to hand in your card to the bank as soon as you breach the limit, and to allow them to retain it until you correct the breach.  Banks will normally apply the rules about credit limits fairly rigidly for new customers.  After some time, they are likely to relax, and to allow some flexibility.  It is not a good idea to rely on such flexibility - banks will normally respond favourably to reasonable requests to increase credit limits - they are often accused of being too generous.

Most (but not all) banks apply a charge for each breach of the credit limit.

Stamp duty on credit cards

We believe that Ireland is unique in the world in having a government stamp duty on credit cards.  We believe that it breaches the spirit of the Single Euro Payments Area (SEPA) concept, which seems to encourage the concept of cross-border competition between banks, in which one should be able to choose to get cards (and other financial services) from any country in the euro area on a "level playing field" basis.  We believe that it militates against electronic transactions, thus perpetuating the use of cash and paper transactions.  At the very least, in the interest of competition within the country, there should be an arrangement whereby one only has to pay stamp duty once when transferring an account from one institution to another

The stamp duty is €30 for each credit card account per annum. Note that some banks allow more than one card on an account - only a single charge of €30 applies in this case.  The charge is applied for each year or part of a year in which the account is held. 

Charges on credit cards

The Financial Regulator conducts regular surveys on charges for credit card services.  Click here for the latest surveys. 

Interest on credit cards

The following is an attempt to simplify the description of how interest is calculated on a typical credit card.  The precise details of how your bank does so may differ from this.  It is important to know that there is no specific legislation on how interest should be applied.

 

If the outstanding balance as shown on a statement is paid in full before the due date shown on that statement, then no further interest will be charged on that amount.  This is so, regardless of whether further purchases have been made which are not yet shown on the statement.

 

If the outstanding balance as shown on a statement is not paid in full before the due date shown on that statement, then interest will be calculated on a daily basis at 1/365 of the annual rate on all balances from either:-

 

the date of the previous statement or

 

the date of purchase

  • to the later of
 

the date on which any repayments are credited

 

the date of that statement

 

 

No interest will be applied to cash withdrawals if the amount is paid in full by the statement date (of course a withdrawal fee will have been applied on the day of withdrawal)

 

However, if the balance is not paid in full, interest will be charged from the date of withdrawal, in addition to the withdrawal fee.

Our message is - Avoid paying interest if you can at all and make sure that you don't accidentally leave a small balance outstanding.

Unauthorised and fraudulent transactions

From 1st Nov 2009, new legislation comes into force regarding unathorised and fraudulent transactions.  This legislation, known as SI 383 of 2009, also known as the Payment Services Regulations is harmonized with similar legislation in 32 European countries.

Among the provisions are:-

  • Card users have obligations to use the card in accordance with the terms governing its use, to keep the card safe, and to notify the bank “without undue delay” in the event of loss, theft, or misappropriation.
  • Card issuers have a range of obligations in relation to the issuance of cards, the security of payment systems, etc
  • In the event of an unauthorised transaction, the bank should be notified within 13 months
  • The onus of proof is on the bank to prove that the transaction was authorized – and the fact that the card was used is not in itself proof of authorization
  • In the event of an unauthorized transaction, the bank must not only refund the amount, but must restore the account to the position it would have been if the transaction had not taken place.  Any interest or penalties arising should be refunded
  • In the event that the card is lost or stolen, the maximum liability of the cardholder is €75, unless the cardholder has acted fraudulently or with gross negligence

From the merchant perspective

In the view of this author, every organisation offering services to the public should accept cards - credit cards and debit cards.  This should include every shop, doctor, dentist, taxi, milk roundsman, etc.  There is just too much cash floating around the country - in the month of writing this page there have been three hijackings of major cash transports - everyone has an obligation to reduce that cash mountain.

There are three organisations offering services of card acquisition in Ireland:-

Elavon

AIB

Ulster Bank

Additionally there are some intermediary organisations who help to provide linkage between merchant and bank.  An example is Realex whose main business involves online card acquisition.

The charges to retailers are negotiated by reference to the nature of the business, the volume of transactions, etc. and may range from about 1% upwards

Many retailers rent card terminals from their bank.  Others have card terminals integrated into their cashier terminals.  In either case, the terminal software must be approved by the card acquiring bank.

Detailed procedures differ both by equipment type and service provider.  Certain over-riding guidelines are provided by IPSO as part of the Chip and Pin initiative.  Click here for details

In general, transactions are undertaken through the day, and uploaded to the card acquiring bank later or overnight and credited to the retailers account.  Large transactions and some smaller transactions are authorised online through the day.

Each month, the retailer will be debited with the amount of the charges, listed by card type.

PCI-DSS

There is naturally a high degree of concern among cardholders and others concerning the recording and storage of credit card numbers.  To address this issue, the payment card industry has introduced a set of standards for procedures and equipment.  Your cards acquirer will provide details.