What is a Credit Card?

What is a Credit Card?

A credit card 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 credit to the consumer from which the user can borrow money for payment to a merchant or as a cash advance the user. 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.

See Also: Understand Credit Score

How credit cards work?

Credit cards permit you to buy goods now and pay later called buying on credit. They aren't connected to your bank account. Like debit cards they can be used to buy goods in shops over the telephone and internet, with the same particulars being required. You can also get a cash advance by drawing money at bank cash machines. Your bank may offer you a credit card or you can apply for one to any institution offering one. The credit card provider will usually run checks to see if you've had problems repaying debts before offering you one called a credit check.

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 deducted from the user's bank accounts, as a result avoiding late payment in total as long as the cardholder has sufficient funds.

Major Types of Credit Card

In Indian credit card market there are a number of credit cards being provided by banks and financial institutions. These cards give a wide selection of financial profit to holders. Following are a variety of credit cards available in India :

Advantages of Credit Card

Following are the advantages of credit cards

Disadvantages of Credit Card

Following are the disadvantages of credit cards.

Tips for selecting the right Credit Card

Decided to go in for a credit card? But do not know how to select? The explosion of cards in the market would simply confuse you while choosing a card. You can, of course, choose to move with whatever comes your way, or whatever your friend recommends, but you at least need some tips and tricks that could help you to get a better card. Following are the things to be considered while choosing a credit card.

Difference Between Credit cards and Debit cards

Credit Card

Every time you use a credit card you are really borrowing money that is made available to you by a bank. The institution pays the debt to the vendor and in turn, you pay the money back to the bank. By signing up for a credit card you agree to pay back the money that you borrowed, in addition to any interest drawn on the amount you borrowed.

Debit Card

Debit cards take funds directly from the money that you have in your bank account. With a debit card you don't have to carry cash or checks and it is very suitable to shop at a variety of places including gas stations, grocery stores, restaurants and retail stores. They give instant admission to your money and are accepted worldwide. Debit cards are used much like credit cards.

How Interest is charged on Credit Cards?

Credit card issuers regularly surrender 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 outstanding.

For example; if a user had a 10,000 operation and repaid it in full within this grace period, there is no interest charged. If however even 1000 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.

What is 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 card issued by the bank. Generally, if a customer is late paying the balance, finance charges will be calculated and the grace period does not apply. 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 customers

Since of strong 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 their low interest period is due to expire. Most such services charge a monthly or annual fee.