Understanding the Financial Sector: Credit Card Companies

This is a follow-up to "Understanding the Financial Sector: Banks" and "Understanding the Financial Sector: Insurance Companies."

I find it amazing that investors and consumers alike do not fully grasp how the consumer credit markets operate, what companies are involved in the various aspects of the credit card market and how credit cards can be effectively used. Given that April is Financial Literacy Month, it's an opportune time to delve into these issues.

Enticing Incentives

Credit cards enter our lives in many different ways. The process usually starts with a solicitation in the mail with an offer for a "zero percent balance transfer" if you open a Chase JPM card.

Or perhaps you see a sign by the store checkout counter, offering "10% off your first purchase" when you sign up for a Wal-Mart WMT card "today!"

How many of you enjoyed Capital One's COF "No Hassle Reward" television commercials so much that you accepted their card offer?

Get the Green Card, the Gold Card, the Blue Card, the Plum Card or the Platinum Card from American Express AXP. Get them all (!) and put together a rainbow of cards because "membership has its privileges."

But the card card introductions that really get under my skin are those checks I get in the mail for "cash advances."

Yes, there are many incentives and promotions that may lure you into opening a credit card account or borrow money, but most people never read the application or understand the terms of the lender's agreement.

It's important to note that not all cards are the same. There are basically three types of cards that are available to consumers: charge cards, credit cards and debit cards.

1. Charge Cards: These cards allow the consumer (you) to purchase products and services, which are then aggregated on a monthly statement and mailed to the "cardholder." Upon receipt of the statement, the cardholder has to pay the charge card company the full amount by a due date. If the cardholder fails to pay, the charge card company will impose a late fee and may prevent the cardholder from making further purchases.

A dominant charge card is American Express. Another well-known brand is Diners Club, which is owned by Citigroup C.

2. Credit Cards: Similar to a charge cards, except the cardholder of one of these may pay the balance that's due over a period of time. The credit card company will charge the cardholder a high rate of interest consummate with rates charged on unsecured consumer debt -- except when an introductory "teaser" rate or balance transfer rate is offered. Often, only a small portion of the balance is due by a certain date. But failure to pay that minimum amount will result in late fees assessed over and above the going interest charges.

Credit cards like these are frequently brought unto the consumer market by two of the most dominant issuers, large banks Chase and Capital One which may issue either MasterCard MA or Visa V branded cards. The payments are then processed by MasterCard or Visa.

Discover Financial Services DFS issue their own brand of card, the Discover Card.

3. Debit Cards: Unlike charge and credit cards, these cards allow a cardholder to make purchases that are immediately paid for via direct withdrawal from a traditional bank account (such as a checking or savings account). There is no extension of credit for debit cards, so no need to pay interest or to worry about due dates and minimum payments.

For as many banks that exist there are likely to be debit cards issued by those institutions (see "Understanding the Financial Sector: Banks").

Now before we get into how these card companies make money, here a few words of financial wisdom on personal credit card use.