Credit cards provide card owners with a method for paying for products and services.
The credit card itself is a small card made of plastic that gives the holder a line of credit to use in place of cash that he/she may or may not have access to at that particular time.
When credit card holders use the credit made available to them they must subsequently make a full or partial repayment against the credit used on an agreed date. The amount of credit used on the card (by the credit card holder) is subject to interest, as with any type of loan or credit agreement.
How Can Credit Cards Be Used?
Credit cards can be used to:
- Pay for products such as electrical goods or food shopping
- Pay for services such as nursery care for children
- Take a cash advance via an ATM or bank cashpoint.
How Do You Get a Credit Card?
Anyone interested in becoming a credit card holder must make a formal application to a credit issuer (who offers a credit card facility). The credit card issuer will then run a series of checks against the credit card applicant to determine the applicant’s creditworthiness. Upon a successful credit check the card issuer will send the applicant their credit card along with the full details of the credit agreement. The credit card holder is then able to use the card for service and product purchases with any organization that accepts that particular brand of credit card.
Using Credit Cards
Nowadays most credit card transactions are verified electronically. The credit card includes a magnetic strip on its back and/or a chip on its face. These devices store data relating to the credit card holder’s account. When a credit card holder makes a purchase with their card, the seller or merchant will swipe the credit card into a machine that communicates electronically to the merchant’s bank.
Every month the credit card issuer sends the card holder a statement of their credit card account. The statement documents all of the financial activity that has taken place on the account since the last statement was produced, alongside any outstanding balance. The credit card holder then has to make a payment (either partial or in full) against the total balance. If the balance is not paid in full the card issuer usually charges interest: interest on credit card balances is usually charged at a higher rate than many other types of credit agreement such as loans or mortgages.
Advantages and Disadvantages of Credit Cards
Credit cards have the following advantages:
- Convenience – credit cards provide a relatively small line of credit for people who wish to borrow money over a short term without having to apply for a loan each time they want to borrow money. Credit cards also negate the need to carry cash.
- Protection – credit card holders have more protection against fraud as well as protection against faulty goods.
Credit cards havethe following disadvantages:
- High interest rates – although often initially low as an introductory incentive to apply for a credit card (for a period up to a year), interest on credit card balances can become high subsequently. This can result in a situation where people lose control of their debt, which can spiral downwards quite quickly.
If you are presently considering a credit card (or credit cards), you should ensure you shop around for the best deal for your financial situation and make yourself aware of the terms and conditions of the credit agreement.