What is a credit card?
A credit card is a small, rectangular card issued by a bank or financial services company, enabling cardholders to borrow funds to pay for goods and services with merchants that accept cards. The card requires cardholders to repay the borrowed money, interest, and additional charges either in full by the billing date or over time.
Credit card issuers can grant a separate cash line of credit (LOC) to cardholders, allowing them to borrow money through bank tellers, ATMs, or credit card convenience checks. These advances have different terms, such as no grace period and higher interest rates, compared to transactions accessing the main credit line. Issuers typically set borrowing limits based on an individual’s credit rating. Credit cards remain a popular payment method for purchasing consumer goods and services.
Comprehending Credit Cards
Credit cards charge a higher annual percentage rate (APR) than other consumer loans. Interest charges on unpaid balances are imposed one month after a purchase, except for 0% APR introductory offers. If previous unpaid balances were carried forward, no grace period is granted for new charges, unless previous balances were carried forward from a previous month.
Credit card issuers must provide a grace period of 21 days before interest on purchases can begin to accrue. Paying off balances before the grace period expires is advisable. It’s crucial to understand whether the issuer accrues interest daily or monthly, as the former incurs higher charges. This is especially important when transferring your balance to a lower interest rate card, as mistakenly switching from a monthly to a daily card may nullify savings.
Types of Credit Cards
Major credit cards like Visa, Mastercard, Discover, and American Express are issued by banks, credit unions, or other financial institutions. These cards often offer incentives like airline miles, hotel room rentals, gift certificates, and cash back on purchases, known as rewards credit cards.
National retailers often issue branded credit cards with the store’s name on the face to build customer loyalty. These cards are easier to qualify for than major cards and can only be used for purchases from the issuing retailer. Some large retailers also offer co-branded major Visa or Mastercard credit cards that can be used anywhere, not just in the retailer’s stores.
Secured credit cards are secured by a security deposit, offering limited credit lines equal to the deposit’s value. These cards are often refunded after responsible usage over time, making them popular among individuals with limited or poor credit histories.
Prepaid debit cards are secured payment cards that match funds in a linked bank account, similar to secured credit cards. Unsecured credit cards, on the other hand, do not require security deposits or collateral and offer higher credit lines and lower interest rates.
