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What are the Salient Features of a Credit Card?

    IndianMoney.com Research Team | Tuesday, April 07,2009, 12:02 PM
 

A credit card is part of a system of expenditure named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of customer line of credit the consumer from which the user can borrow money for payment to a merchant or as a cash advance the user.

A credit card is different from a debit card where a debit card requires the balance to be paid in full. In contrast, credit cards allow the consumers to rotate their balance, at the cost of having interest charged. Most credit cards are issued by local banks or credit unions and are the shape and size specified by the standard. Credit cards are issued after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card.

When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a Cardholder Not Present (CNP) transaction.

Electronics verification systems permit merchants to verify that the card is valid and the credit card customer has enough credit to cover the purchase in a few seconds, allow the confirmation to happen at time of purchase. The verification is performed using a credit card payment terminal or point of sale (POS) scheme with a infrastructure link to the merchant's acquire bank.

Each month, the credit card user is sent a statement indicating the purchases undertake with the card, any exceptional fees, and the total amount to be paid. After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect. Otherwise, the cardholder must pay a distinct minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the entire amount allocated. The credit provider charges interest on the amount billed if the balance is not paid in full. Some financial institutions can arrange for automatic payments to be deduct from the user's bank accounts, as a result avoiding late payment in total as long as the cardholder has sufficient funds. . Credit cards as funding for entrepreneurs. Credit cards are a inspired, yet often risky way for entrepreneurs to acquire capital for their start ups when more conventional financing is unavailable

Interest charges

Credit card issuers usually waive interest charges if the balance is paid in full each month, but naturally will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid. For example, if a user had a $1,000 operation and repaid it in full within this grace period, there is no interest charged. If, however, even $1.00 of the total amount remains due, interest would be charged on the $1,000 from the date of purchase until the payment is received.The exact manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement

Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as (RRFC) residual retail finance charge. Thus after an amount has revolve and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full.

The credit card may simply serve as a form of rotating credit, or it may become a difficult financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually this compartmentalization is the result of special incentive offers from the issuing bank, to push balance transfers from cards of other issuers. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue.

Benefits to customers

Since of intense competition in the credit card industry, credit card providers often offer incentives such as frequent flyer points, gift certificates, or cash back (normally up to 1 percent based on total purchases) to try to attract customers to their programs. However it should be noted that the incentive is insignificant to the interest charged for carrying a balance. Low interest credit cards or even 0% interest credit cards are available. However, services are available which alert credit card holders when there low interest period is due to expire. Most such services charge a monthly or annual fee.

Detriments to customers

Credit cards with low initial rates are limited to a fixed term, usually between 6 and 12 months after which a higher rate is charged. As all credit cards assess fees and interest, some customers become so burdened with their credit debt service that they are driven to bankruptcy. Credit cards will often specify a default rate of 20 to 30 percent in the event a payment is missed. That is, if a consumer misses a payment, the rate will automatically increase to a very burdensome level. This can lead to a snowball affect in which the consumer is drowned by unexpectedly high interest rates. Further most card holder agreements enable the issuer to arbitrarily raise the interest rate for any reason they see fit.

Grace period

A credit card's grace period is the time the customer has to pay the balance before interest is charged to the balance. Grace periods vary, but usually range from 20 to 40 days depending on the type of credit card by the issuing bank. Some policies allow for return after certain conditions are met.

Generally, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance; with the majority credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement (interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.

Benefits to merchants

An example of street markets accepting credit cards. Most simply display the logos(shown in the upper-left corner of the sign) of all the cards they accept.

For merchants, a credit card transaction is often more secure than other forms of payment, such as checks, because the issuing bank commits to pay the merchant the moment the transaction is authorized, regardless of whether the consumer defaults on the credit card payment (except for legitimate disputes, which are discussed below, and can result in charges back to the merchant). In most cases, cards are even more secure than cash, because they discourage theft by the merchant's employees and reduce the amount of cash on the premises. Prior to credit cards, each merchant had to evaluate each customer's credit history before extending credit. That task is now performed by the banks which assume the credit risk.

For each purchase, the bank charges the merchant a commission (discount fee) for this service and there may be a certain delay before the agreed payment is received by the merchant. The commission is often a percentage of the transaction amount, plus a fixed fee. In addition, a merchant may be penalized or have their ability to receive payment using that credit card restricted if there are too many cancellations or reversals of charges as a result of disputes. Some small merchants require credit purchases to have a minimum amount (usually between $5 and $10) to compensate for the transaction costs, though this is strictly prohibited by credit card companies and must be reported to the consumer's credit card issuer. In some countries, for example the Nordic countries, banks guarantee payment on stolen cards only if an ID card is checked and the ID card number/civic registration number is written down on the receipt together with the signature. In these countries merchants therefore usually ask for ID. Non-Nordic citizens, who are unlikely to possess a Nordic ID card or driving license, will instead have to show their passport, and the passport number will be written down on the receipt, sometimes together with other information. Some shops use the card's PIN for identification, and in that case showing an ID card is not necessary.

Costs to merchants

Merchants are charged many fees for the privilege of accepting credit cards. The merchant may be charged a discount rate of 1%to3%+ of each transaction obtained through a credit card. Usually, the merchant will also pay a flat per-item charge of $0.05 - $0.50 for each transaction. Thus in some instance of very low value transactions, use of credit cards may really cause the merchant to lose money on the transaction. Merchants choose to pay these costs in exchange for the increased profitable sales they can create. Thus, they are considering part of the overall cost of marketing. Merchants with very low average transaction prices or very high average transaction prices are more averse to accepting credit cards. But rates are often reduced in an attempt to include more of these types of merchants.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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