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Why do credit cards expire?

Q: What does your credit card have in common with a carton of milk?
A: Both have an expiration date.

But while it makes sense that dairy products go bad, what gives with the don't-use-after date on plastic?

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The truth is that different companies include it for different reasons. But in most cases, issuing banks and credit card associations like MasterCard and Visa cite fraud protection and the lifespan of the magnetic strip as the main reasons to include an expiration date on cards.

"It's pretty much two reasons," says Seth Eisen, spokesman for Visa USA. "The first is cardholder security, to protect against identity theft and fraud."

Betty Reiss, spokeswoman for Bank of America, agrees. "It provides another verification point," she says.

Expiration dates tend to be more effective as another layer of fraud protection when transactions are processed manually, says Lynne Strang, vice president of communications for the American Financial Services Association, a trade association for firms that issue credit.

In the United States, the expiration date becomes "less significant" for fraud prevention "because most transactions are authorized electronically," she says.

The second reason for an expiration date? Unlike a diamond, plastic isn't forever. "The magnetic strip disintegrates over three to four years," says Janis Tarter, spokeswoman for Citi Card.

Sometimes the magnetic strip "gets worn off or gets cracked," says Eisen. By supplying new cards on a regular cycle, the companies insure that "the magnetic strip is functioning the way it was intended," he says.

"There also might be updates on that magnetic strip," Eisen says. "It allows the issuer to update that information."

The lifespan of a credit card is "at the issuer's discretion," he says, meaning it's the issuing bank or credit union that decides your card's shelf-life. "The average is approximately three years," he says.

No one right answer
Credit industry watchers see a myriad of reasons for expiration dates, including the opportunity to take a current snapshot of your personal information to market other services; a chance to reassess your risk, or even just an excuse to remind you that you have credit available.

If you've had the card for a few years (and especially if you haven't used it lately), the company would probably welcome a chance to re-establish contact, says Robert D. Manning, a professor of finance at the Rochester Institute of Technology.

"It's a way of finding out if there's a person still associated with the card," he says. At the same time, it's also an opportunity for the issuer to update the information they will use to market services and products to you, Manning says.

When you get a notice from your card company, it's rarely good news, says Manning. "This is a point of contact that triggers a positive response from the consumer," he says.

And "if the account hasn't been used, it might trigger a memory," says Manning.

Some credit industry watchers believe that, like the appendix, a credit card expiration date is one of those things that used to be a lot more practical than it is now.

It's likely a holdover from the days when credit cards companies couldn't check your credit records as regularly as they do now, says Michael Staten, professor and director of the Credit Research Center at Georgetown University. So they built in an escape clause. After a couple of years, if you weren't the customer they thought you were, companies would have the right to change the terms or get out of a contract altogether.

But modern accounting methods and contracts have pretty much negated the need for an escape clause for credit card issuers. Credit issuers can and do check up on clients when they believe there is a need and the customer's rate may change accordingly.

"These days it has been ingrained as such a part of risk management they can flag an account every couple of weeks," Staten says.


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-- Posted: Feb. 2, 2005




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