What is a credit card? (with photos)

A credit card.

The plastic credit card with magnetic stripe that many people carry in their wallet or wallet is the end result of a complex banking process. Holders of a valid card are authorized to purchase goods and services up to a predetermined amount, called the credit limit. The seller receives essential information from the cardholder, the card-issuing bank actually reimburses the seller, and eventually, the cardholder reimburses the bank through regular monthly payments. If the entire balance is not paid in full, the issuer may legally charge interest rates on the unpaid portion.

The terms of a credit card.

Individual banking institutions have their own policies when it comes to credit card applications. Customers can pursue a secured or unsecured card, depending on their individual payment histories or credit rating. A secured card requires the applicant to deposit an amount of cash equivalent to the desired credit limit. A deposit of $1500 USD, for example, should be enough to issue a card with a spending limit of $1000 to $1500. If the customer does not make sufficient payments, the money deposited will be used to pay off the debt.

Possible scenarios for credit card debt.

An unsecured credit card, on the other hand, is usually issued to those who have a good credit history and have demonstrated an ability to pay off accumulated debt on time. Credit limits are determined individually and may be raised or lowered based on performance. An unsecured card is essentially a pre-approved loan, with higher interest rates than a similar personal bank loan.

Credit cards allow people to make purchases on credit, paying the full amount regularly.

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The main benefit of any credit card is instant access to more money than a person can have on hand. A recent college graduate, for example, may have to buy a work suit for employment purposes. Earning the required $200+USD for an average suit can take weeks, and he or she needs the suit to receive the income. Putting the suit on the credit card would be the ideal solution; the borrower could pay the balance with his first paycheck and little interest would accrue.

A credit card may be required to make hotel reservations.

Credit cards often become problematic when the cardholder accumulates more debt than a regular monthly payment can cover. The issuing bank allows users to carry balances every month, which is also called revolving credit, but significant interest rates can also be levied on these balances. Failure to make a scheduled payment can also cause the bank to raise interest rates on a delinquent account. If the cardholder can only pay the minimum amount owed each month, then he is not reducing the actual debt incurred. Minimum payments may apply to accrued interest only. This is a financial spiral that many cardholders can face if they don’t use proper cost containment.

Credit cards usually have a magnetic strip.

A credit card gives its holder immediate credibility for services such as hotel reservations, car rentals and airline reservations. Those without a credit card often have to guarantee their reservation with cash deposits or various forms of identification. Many credit card plans also include insurance against theft or fraud. If a card is stolen and used illegally, the cardholder will not be held responsible for unauthorized charges. The cardholder may authorize others to use the card for purchases or services, however. Ultimately, the primary cardholder is responsible for all charges made to their account.

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Having a credit card is not a requirement for a successful life, but even those who only pay for goods or services with cash on hand often find it a convenient form of identification and instant credibility. To avoid excessive debt, the holder must decide whether the goods or services are worth the increased expenses.

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