What's credit card ?
A
credit card system is a type of retail transaction settlement and
credit system, named after the small plastic card issued to users of the system. A credit card is different from a debit card in that the credit card issuer lends the consumer money rather than having the money removed from an account. It is also different from a
charge card (though this name is often used to describe credit cards by the public) in that charge cards do not extend the user credit -- the charges must be paid each month in full. Most credit cards are the same shape and size, as specified by the ISO 7810 standard.
How they work?
A credit card user is issued the card after approval from a provider (often a general bank, but sometimes from a captive bank created to issue a particular brand of credit card, such as American Express Centurion Bank), in which they will be able to make purchases from merchants supporting that credit card up to a prenegotiated credit limit. When a purchase is made, the credit card user indicates his/her consent to pay, usually by signing a receipt with a record of the card details and indicating the amount to be paid. More recently, electronic verification systems have allowed 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. Some services can be paid for over the telephone by credit card merely by quoting the number embossed onto the card (the
credit card number), and they can be used in a similar manner to pay for purchases from online vendors.
Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, and the total amount owing. The cardholder must then pay a minimum proportion of the bill by a due date, and may choose to pay more or indeed pay the entire amount owing. The credit provider charges interest on the amount owing (typically, a fairly high rate much higher than most other forms of debt). Typically, credit card issuers will waive interest charges if the balance is paid in full each month, which allows the credit card to serve as a form of
revolving credit. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if you're late with a payment on that card
or any other credit instrument. You can
calculate the savings with a lower-interest credit card (http://www.low-interest-rate-credit-card-offers.com/calculator.htm); if you have a large balance, those savings can be considerable.
As well as profits through interest, card companies charge merchants fees for money transfer. When the companies formally or informally prevent these fees from being passed on to credit card users but instead require them to be spread among all customers, this raises the possibility of a harmful market imperfection through the mechanism of the Tragedy of the commons, especially as some credit providers give their users incentives such as frequent flier miles or gift certificates. Australia is currently acting to reduce this by allowing merchants to apply surcharges for credit card users. Credit card companies generally do provide a guarantee the merchant will be paid on legitimate transactions regardless of whether the consumer pays their credit card bill. However, credit card companies generally will not pay a merchant if the consumer challenges the legitimacy of the transaction and will fine merchants who have a large number of chargebacks.
The credit card was the successor of a variety of merchant credit schemes. The concept of paying merchants using a card was invented in 1950 with Diners Club's invention of the
charge card, which is similar but required the entire bill to be paid with each statement. Credit card service was first offered in 1951.
In recent times, credit card portfolios have been exceedingly profitable to banks, largely due to the booming economy of the late nineties. However in the case of credit cards, such high returns go hand in hand with risk.
Secured credit cards
A secured credit card is a special type of credit card in which you must first put down a deposit between 100% and 150% of the total amount of credit you desire. Thus if you put down $1000, you will be given credit in the range of $500�$1000. This deposit is held in a special savings account. The owner of the secured credit card is still expected to make regular payment, as he or she would with a regular credit card, but should he or she default on a payment, the card issuer can deduct payments on the card out of the deposit. Secure credit cards are an advantage to anyone with poor or no
credit history. They are often offered to people as a means of rebuilding one's credit. Secured credit cards are available with both Visa and MasterCard logos on them.
