Have you been asking the question – what is a credit card? Well you’ve arrived at the right spot. Today we explore what a credit card is.
A credit card at the most general level is a small plastic card with a magnetic strip that is personalized to an individual (containing idetnifying information).
It allows people to make a payment without using cash, but rather using the card itself. A credit card can only be issued by a payment authority after credit behaviour/rating has been cleared and the card approved by the relevant service provider – such as a bank. The card works as follows:
- A person makes a payment for goods or services at merchants who that accept the specific card type (Mastercard, Visa, American Express etc.)
- The payment is made on promise by the payee that the goods/services will be made automatically by the card issuer after which the payment will be sorted out between the issuer and card holder/payee
- The card serves as the authority that payment will be made
- The card is issued with credit permitted to the individual to be payed back at a specified date
- In essense this is a cash advance made to the consumer by a lender
Pros and Cons
The credit card continues despite debt build up and the consumer can continue to use the card (interest is charged to the consumer on overdue payment). This differs from a charge card which must be paid in full usually at the end of a month and debt cannot surmount. It also differs from a cash or cheque/check card which works on similar premise to cash – where one can only spend money which is currently available to the consumer in a bank account.
A problem arises when the credit card holder accrues more debt than they can afford to pay on a monthly basis – leading to more debt build up and ‘bad credit behaviour’. Another potential issue is if the card or card details land up in the hands of another individual/are stolen/misused as the ultimate responsibility for credit activity from the credit card lie on the credit card holder.
On the other hand – the credit card, if disciplined consumer activity, may be an efficient means of having forward credit/credit on hand that can be held accounted for at the end of the month. It also enables the consumer to reserve payment for services/goods such as reservations, rentals, airline tickets, deposits.
SPEND WITHIN YOUR MEANS AND A CREDIT CARD WILL BE AN EFFECTIVE PAYMENT OPTION!!!
Steps in credit card transactions
- Payment reserved – use credit card as payment method
- Authorisation – provided by the authority on your credit card, suggesting validity of card and credit information and reserving funds for purchase
- Batching – the credit merchants responsibility – batching payments and sending through to the credit authority for payment to be made to the merchant
- Payment is made to the merchant by the authority on the card (bank)
- Settlement – card payments are settled by the credit card holder with the authority (usually at the end of the month)
- Interest – if debt is accrued on the account interest is charged to the card holder for the entire amount outstanding on the card – the interest increases and continues as debt remains unpaid or increases
- Chargebacks – or refunds – generally initiated by the card holder if an amount is overpaid to the merchant, the merchant is overcharged or the likes. This would entail a refund process.
Apply for a credit card, but get a credit check first.