What is a credit card? February 26
A Credit card is a transaction settlement device which is usually in the form of a plastic card. Unlike a debit card a credit card money is loaned instead of directly taken out from a bank account. The balance on a credit card is revolved and the credit card issuer charges an interest on the amount loaned.
How do credit cards work?
A credit card is usually issued to a consumer by a bank after the bank verifies the consumers credit worthiness. Based on the credit worthiness the bank will set the credit limit and the interest rate on the credit card. The credit worthiness is usually verified by pulling a Credit Report of the consumer. The better the Credit Report; the higher the credit limit and lower the interest rate.
Then the consumer can use the credit card during purchases to settle the debt as long as credit limit has not been reached. In most cases the merchants have terminals or magnetic card readers through which the credit card is swiped. During the swipe the terminal reads the credit card information and contacts the credit card issuing bank. And based on the credit limit and the amount of purchase the transaction is approved or declined almost instantaneously. Similarly the credit cards can also be used over the phone and for shopping online. Then the consumer signs a receipt stating that the consumer will pay the amount that was charged to the credit card.
Every month the credit card issuing bank sends a statement to the consumer listing his purchases. The statement also includes the total amount owed on the credit card along with a minimum payment needed. The consumer can pay off the total amount owed or a partial amount but he/she has to pay the minimum payment. These payments are then reported to the Credit Bureaus and are then included in the Credit Report.