What is a Credit Card Company?

Majority of Canadian consumers use credit cards to make purchases for goods and services. It has become an essential tool which makes it easier for people since they can do their shopping without having to carry large amounts of cash.

The article gives information about the following:
  1. How do Credit Card Companies Earn Revenues?

  2. Benefits and disadvantages of Credit Cards to Consumers

  3. Ill Effects of Credit Cards on Canadian Consumers

How do Credit Card Companies Earn Revenues?

Credit card firms charge annual fees, interests on late payments and revolving loans, over limits and past dues.
These card issuers get a percentage for each item consumers buy from merchants which range from one to four percent from each purchase.
They accumulate expenses that you may not have considered and pass these expenses on to you through interest rates, annual fees, and late charges. However, they face a big risk which is money that they lend to card holders but are not paid for various reasons.
Because most credit cards are unsecured, if a person decides not to pay their debt, there is little that credit card issuers can do to get their money back. It is more expensive to collect than writing off the bad debt off.
Credit card issuers must also justify the investment by making as much interest as they could make investing in real estate, bonds or other securities.
Due to the risk of lending money via a credit card, you may notice that credit card issuers typically charge higher interest than regular loans. Most credit card holders feel the higher interest is worth the convenience of using a credit card

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What are the benefits and disadvantages of Credit Cards to Consumers?

The major benefit is convenience. Compared to debit cards and cheques, a credit card allows small short-term loans to be quickly made to a customer who need not calculate a balance remaining before every transaction, provided the total charges do not exceed the maximum credit line for the card. Credit cards also provide more fraud protection than debit cards. Many credit cards offer rewards and benefits packages, such as enhanced product warranties at no cost, free loss or damage coverage on new purchases, various insurance protections, rental car insurance, common carrier accident protection and travel medical insurance. Credit cards can also offer reward points which may be redeemed for cash, products, or airline tickets.
On the other hand, there are also downsides such as the following:

High interest and bankruptcy
Low introductory credit card rates are limited to a fixed term, usually between 6 and 12 months, after which a higher rate is charged. As all credit cards charge fees and interest. Some customers become so indebted to their credit card provider that they are driven to bankruptcy. Some credit cards often levy a rate of 20 to 30 percent after a payment is missed. In other cases a fixed charge is levied without change to the interest rate. In some cases universal default may apply. The high default rate is applied to a card in good standing by missing a payment on an unrelated account from the same provider. This can lead to a snowball effect in which the consumer is drowned by unexpectedly high interest rates. Most card holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit.

Inflated pricing for all consumers
Merchants that accept credit cards must pay interchange fees and discount fees on all credit-card transactions. In some cases merchants are barred by their credit agreements from passing these fees directly to credit card customers, or from setting a minimum transaction amount.
Weakens self regulation
Several studies have shown that consumers are likely to spend more money when they pay by credit card. Researchers suggest that when people pay using credit cards, they do not experience the abstract pain of payment.

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What are the Ill Effects of Credit Cards on Canadian Consumers?

Credit cards are said to cost Canadian consumers billions of dollar every year.

The Competition Bureau says “Canada's credit card issuers have set up a perverse system that thwarts the normal rules of the marketplace and costs consumers billions of dollars annually.”
Canada has among the highest costs in the world to process credit-card transactions. These costs have witnessed massive hikes since the creation of premium credit cards. With profit margins in some small business segments around 5% and credit-card processing often costing 2% to 3% of sales, it is not hard to understand why a business owner pays attention when someone promises significantly lower costs. Sadly, the need to reduce credit card acceptance costs has left many owners vulnerable.

Here are some so-called bad practices:
Flat rate is double for some transactions. A business is promised a low, flat rate for processing all transactions, not realizing that the flat rate is charged at double the rate for “non-qualified” transactions such as processing premium cards.
Extra fees written by unscrupulous agents are getting signatures on processing contracts.
A low rate is promised and a business owner signs a deal, not realizing that he or she has signed two separate contracts. One is for processing and another to lease the equipment. Then the processor increases the fees knowing the business cannot get out of their lease without paying a massive penalty.
Unapproved fees are taken from the merchant’s account, after which the provider disappears, not taking calls or producing copies of the contract that supposedly supports those fees.

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Credit Card Industry

The Canadian Federation of Independent Business is working hard to get the credit card industry to clean up its act and treat small businesses fairly. There are early signs some card brands are getting the message, but they are moving far too slowly given the serious nature of the issues.

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