subject: Credit Card, What Is It? [print this page] What is a Credit Card? A card issued by a financial company giving the holder an option to borrow funds, usually at the point of sale. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made and borrowing limits are pre-set according to the individual's credit rating. A credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder's promise to pay for them. The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user.
A credit card is different from a charge card: a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. A credit card also differs from a cash card, which can be used like currency by the owner of the card.
Credit cards are issued by a credit card issuer, such as a bank or credit union, after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card
When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet,
The first universal credit card -- one that could be used at a variety of stores and businesses -- was introduced by Diners Club, Inc., in 1950. With this system, the credit-card company charged cardholders an annual fee and billed them on a monthly or yearly basis. Another major universal card -- "Don't leave home without it!" -- was established in 1958 by the American Express company.
The first national bank plan was BankAmericard, which was started on a statewide basis in 1959 by the Bank of America in California. This system was licensed in other states starting in 1966, and was renamed Visa in 1976.
Other major bank cards followed, including MasterCard, formerly Master Charge. In order to offer expanded services, such as meals and lodging, many smaller banks that earlier offered credit cards on a local or regional basis formed relationships with large national or international banks.
Reason for having a credit card:
SignUp Bonuses. The standard debit card offers zero rewards or very small rewards. Credit cards offer significant rewards when used responsibly.
Cash Back. If you sign up for the right credit card, you can earn from 1-5% back on your purchases.
Investment Rewards. Credit cards offer a higher rate of cash back; in exchange you must deposit your cash back directly into an investment account.
Frequent-Flyer Miles. Cardholders can rack up miles at a rate of one mile per dollar spent, or sometimes one mile per two dollars spent. The price of the plane ticket you ultimately end up redeeming your miles for will determine how valuable this credit card reward is, but many frequent flyer cards are made immensely more valuable by their mileage signup bonuses.
Reward Points. Many card rewards work on a point system where you earn up to five points per dollar spent. When you reach a certain point threshold, you can redeem your points for gift cards at some stores. You can also use the gift cards as gifts, making holiday and birthday shopping simpler and less expensive.
Safety. Paying with a credit card makes it easier to avoid losses from fraud. Legitimate payments for which you've scheduled online payments or mailed checks may bounce, triggering insufficient funds fees and making your creditors unhappy. Late payments can also lower your credit score. It can take a while for the fraudulent transactions to be reversed and the money restored to your account while the bank investigates.
Grace Period. When you make a credit card purchase, your money remains in your checking account until a couple of weeks later when you pay your credit card bill. Hanging on to your money for this extra time can be helpful in two ways. First, if you pay your credit card from a high-interest checking account and earn interest on your money during the grace period, the extra interest will eventually add up to a meaningful amount. Second, when you always pay with a credit card, you don't have to watch your bank account balance like crazy to make sure you stay in the black.
Insurance. Most credit cards automatically come with a plethora of consumer protections that people don't even realize they have, such as rental car insurance, travel insurance and product warranties that may exceed the manufacturer's warranty.
Universal Acceptance. When you want to rent a car or stay in a hotel room, you'll almost certainly have an easier time if you have a credit card. Rental car companies and hotels want customers to pay with credit cards because it can be easier to charge customers for any damage they cause to a room or a car this way.
Building Credit. If you have no credit or are trying to improve your credit score, using a credit card responsibly will help your credit score because credit card companies will report your payment activity to the credit bureaus. Debit card use doesn't appear anywhere on your credit report, however, so it can't help you build or improve your credit.
