Credit is a method of selling goods or services without the buyer having cash in hand. A credit card is only an automatic way of offering credit to a consumer. A credit card is basically a plastic card with a magnetic strip invented with the intention to simplify the complicated banking process for an individual in case he/she is short of cash, be it something casual like shopping or something severe like an emergency situation.
The dictionary defines a credit card as ‘A card which can be used to obtain cash, goods or services up to a stipulated credit limit. The supplier is later paid by the credit card company which in due course is reimbursed by the credit card holder who will be charged interest at the end of the credit period if money is still owing.’
The word credit comes from Latin, meaning “trust. This means that using a credit card is effectively like taking-out a loan. That loan must be re-paid to the credit card company (the lender) within the credit cycle (billing is usually every 30 days and thus the credit period can vary from 7 days to 45 days depending on when the purchase was made). If the money is not repaid within this time an interest charge is levied (applied) to the remaining balance. A credit card generally works by giving its holder an immediate authority to purchase services and goods such as travel and hotel reservations as well as shopping for merchandise in and outside country.
All the credit card comes with a credit limit, a predetermined amount of money which its lender is offering as credit to a credit card holder to spend wherever he wants to. Before issuing a credit card to an individual, the bank or the financial institution has a look at his/her credit rating alongside verifying his/her credit history.
After receiving the needful information about the applicant, the lender company issues the credit card to him. Now if the credit card holder goes shopping with his credit card, he pays the vendor through the card which is actually reimbursed to the vendor through the bank or the lender company. And finally, the cardholder then repays the bank for the entire credit amount that he has used, by paying it back through regular monthly payments.
It is part of a system of payments 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 credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.
Credit card works differently from the debit card. It is issued after a credit card application has been made to the issuer. The issuer then lends money to the credit card holder generally on different rates of interest. And if a consumer is using credit cards then it means he can reconcile his balance at the cost of charging interest and it would make his payment period longer than before. Most credit cards are having almost the same shape and size around the globe.
Credit cards work in a very simple way, a consumer is issued a credit card after his application for credit card has been approved by concerning authorities and a credit company shows its consent to issue the applicant a credit card. Now the customer who has purchased the credit card will be able to buy things on credit up to the limit of credit which was agreed upon by both parties in terms and conditions.
A consumer can also use credit card online facilities to get benefit from his credit card. This online credit card facility is easy to use and it is faster than the actual procedures of cash transactions. A customer can apply credit card on different outlets and he can also make purchase online by using his credit card in a case he does not have liquid cash.
Every credit card is supported by a credit card companies. Some of credit cards companies are best and they offer very user-friendly credit cards. In these cards the widely known cards are Visa Credit Cards & Master Credit Cards they are used all over the world.
Different credit card companies and credit banks also maintain a system of credit check to get their credit in times. So a consumer will not be able to deceive them by using their credit cards. This credit check is maintained regularly and if a credit card holder is not able to pay his payments in the assigned time of payment then he will be given a grace period and in a case he would not be able to pay his credit. His credit card would be blocked. And he will not be able to make any further purchases from his credit card.
Most credit cards are issued by local banks or credit unions, and are the shape and size specified by the ISO/IEC 7810 standard as ID-1.
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 Personal Identification Number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a ‘Card/Cardholder Not Present’ (CNP) transaction.
Electronic verification systems allow merchants to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or Point of Sale (POS) system with a communications link to the merchant’s acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card.
Other variations of verification systems are used by eCommerce merchants to determine if the user’s account is valid and able to accept the charge. These will typically involve the cardholder providing additional information, such as the security code printed on the back of the card, or the address of the cardholder.
How Credit Card Work?
A user is issued a credit card after an account has been approved by the credit provider (often a general bank, but sometimes a captive bank created to issue a particular brand of credit card), with which they will be able to make purchases from merchants accepting that credit card up to a pre established credit limit.
When a purchase is made, the credit card user agrees to pay the card issuer. Originally the user would indicate his/her consent to pay, by signing a receipt with a record of the card details and indicating the amount to be paid, but many merchants now accept verbal authorizations via telephone and electronic authorization using the internet.
Electronic verification systems allow merchants (using a strip of magnetized material on the card holding information in a similar manner to magnetic tape or a floppy disk) to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase in a few seconds, allowing the verification to happen at time of purchase. Other variations of verification systems are used by eCommerce merchants to determine if the user’s account is valid and able to accept the charge.
Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, and the total amount owed. The cardholder must then pay a minimum proportion of the bill by a due date, and may choose to pay the entire amount owed or more. The credit provider charges interest on the amount owed (typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for automatic payments to be deducted from the user’s accounts.
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.
The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is APR/100 x ADB/365 x number of days revolved. Take the Annual percentage rate (APR) and divide by 100 then multiply to the amount of the average daily balance (ADB) divided by 365 and then take this total and multiply by the total number of days the amount revolved before payment was made on the account. 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 or Residual Retail Finance Charge. Thus after an amount has revolved 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 (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid i.e. when the balance stopped revolving).
The credit card may serve as a form of revolving credit, or the user may choose to apply any payments toward recent rather than previous debt. 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. As the rates and terms vary, services have been set up allowing users to calculate savings available by switching cards, which can be considerable if there is a large outstanding balance.
Because profit margins in the credit card industry can be quite high, credit providers often offer incentives such as frequent flier miles, gift certificates, or cash back (typically 1 percent) to try attract customers to their program.
Low interest credit cards or even 0% interest credit cards are available. The only downside to consumers is that the period of low interest credit cards is limited to a fixed term, usually between 6 and 12 months. 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.