A credit card is a type of payment card (traditionally a rectangular plastic or metal piece with a standard size of 3.37 inches (85.6 mm) in width, 2.125 inches (53.98 mm) in height and rounded corners) which provides the possibility to buy goods and services on credit. Credit cards appeared at the end of the 20th century, and by now it has quickly become one of the most popular ways of payment.
How a Credit Card works
The following system is being used — a bank or a credit union issues a credit card and makes agreements with the merchants and retailers that they accept the card as a form of payment. Funds to pay for a purchase then are distributed from a card issuer to a merchant or a retailer, while the user of the credit card returns the debt later. In many cases, no interest is charged if the debt is repaid in time, though different credit cards are issued under different conditions, and it’s important to clarify terms and conditions before using a certain credit card.
Important features of Credit Cards
Credit cards represent a good example of a revolving credit. An account opened for a credit card isn’t closed once the first debt is repaid, but is open for further use.
Traditionally, an issuer of a credit card sets a limit on the amount of money it’s possible to borrow on the basis of the potential user’s credit score. After a user purchases something on credit, a period of time is given to repay the debt without interest (it’s called grace period and usually lasts from 21 to 31 days), if there are no unpaid debts from previous periods. It’s also a common practice that an initial period is charged with no interest to attract new users of credit cards, but then there might be interest or fees for the following periods, so it’s crucial to check that out.
Credit card issuers often stimulate new customers by offering special conditions on certain things. Popular inducements include cashback on different types of goods, airline points, various gifts and other offers.
One more important thing to know about credit cards is that its annual percentage rate is traditionally significantly higher than of other types of loans.
Another important option of credit cards, besides regular purchasing on credit, is providing its users with a possibility of cash lines of credit. This type of crediting usually works under different conditions, has other interest rates and doesn’t usually have grace period.
Credit card types
There are two main types of credit cards worth mentioning:
- secured credit cards (in this case, a loan is secured by collateral, which is usually equal to the maximum amount of money possible to be borrowed for one period);
- unsecured credit cards (no collateral is used for this type of credit card).
The main difference between them is that a card issuer requires a deposit to get a secured credit card. At the same time, this type of credit cards is good for those with poor credit history. As it is secured, card issuer take fewer risks, and secured credit cards are easier to obtain by individuals with a weak credit score.
One more useful feature of this type of cards is that after the rational and responsible managing of a secured credit card, the credit history tends to improve, and it’s possible to gain access to regular credit cards later.