Credit Cards

By Entrepreneur Staff


Credit Cards Definition:

A bank-issued card that allows people to purchase goods or services from a merchant on credit

When you accept credit cards, you make it easy for your customers to buy from you because you're offering convenience and the chance for the customer to buy on "float." Yet the money isn't coming out of your pocket--quite.

A kitchenware store in Atlanta might take a Visa card purchase from a customer who lives in Milwaukee and has a credit card that was issued by a bank in that city. The sales slip is deposited along with the other receipts in the store's bank account.

The Atlanta bank credits the amount of the sale less a handling fee, generally 4 to 7 percent. Assuming the sale was $20 and the handling fee is 5 percent, the Atlanta storeowner actually receives only $19. The loss of the one dollar is built into the store's pricing and profit structure and passed along to the customer.

Then the Atlanta bank transfers the debt to the customer's Milwaukee bank, which stands behind the debt and transfers the necessary funds to the Atlanta bank. The Milwaukee bank then bills the customer for the $20, plus interest if payment isn't received by a certain date. The bottom line is that the storeowner in Atlanta offered credit without much risk, the Milwaukee customer received the merchandise, and the banks in both cities made money.

Since the credit card companies are shouldering the risks in granting credit, they expect merchants to help them cut their losses. Both Visa and MasterCard publish regular lists of card numbers that are unacceptable for some reason, and they send them out to merchants and expect you to look at this list before granting credit.

American Express, Discover and Diner's Club are also credit cards you may decide to accept. They differ considerably from bankcards because their credit requirements are generally higher. Most bankcards grant credit if a person has a job, a permanent residence, and no questionable information in a computer credit file.

These so-called "entertainment cards" generally have a higher credit ceiling. Bankcards will put a credit line to a customer's account and hold the person to that limit. Entertainment cards are geared to the more affluent consumer with lots of discretionary dollars to spend.

The final difference is that entertainment card companies expect to be paid in full each month, while the bank cards give the customer two options: Pay the balance in full or pay a minimum of 3 percent of the total balance plus interest monthly. With high rates of interest, banks profit handsomely if cardholders don't pay off their entire credit card bill at once.

If you haven't already been approached by one of the major credit card representatives, approach them. Their sales associates work on commission and are happy to pitch the advantages of the various programs.

Offering a credit card program eliminates the time you waste handling credit sales. When you consider that certain costs of credit are fixed (posting accounts, billing and so on) and will cost you the same for a $10 sale as for a $500 sale, this argument also makes sense.

A marketing benefit that helps your advertising sales is the automatic mailing list the credit-card sales slip provides you with. You can (if you ask customers to fill in their name and address) have a day-by-day record of that customer's purchases and use your mailing list to promote future sales by mail.

Another benefit the sales personnel will tout is the security of credit card sales. You will (if you follow the credit card company's guidelines) be able to collect your money even if the cardholder skips town. The credit card operation assumes the risk and pursues collection, which helps you spend your time more profitably running your business.

More from Credit and Collections

Credit Cards

A bank-issued card that allows people to purchase goods or services from a merchant on credit

See full definition

Credit Policy

Guidelines that spell out how to decide which customers are sold on open account, the exact payment terms, the limits set on outstanding balances and how to deal with delinquent accounts

See full definition

Credit, Extending

Offering your customers the option of paying for the products and services they purchase from you at a later date instead of upfront

See full definition

Merchant Status

The relationship between a company and a bank or credit card company that allows the company to accept credit card payments from its customers

See full definition

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