A credit card is a plastic payment card issued by a financial institution, allowing the cardholder to borrow funds to make purchases or pay for services. The cardholder is given a credit limit—the maximum amount they can borrow. Transactions made with a credit card create a debt that the cardholder must repay, either in full by the due date or by making minimum payments, with interest charged on the remaining balance.
Credit cards offer a convenient way to make transactions, build credit history, and often come with additional benefits such as rewards or cashback programs. However, if not used responsibly, they can lead to debt accumulation due to high-interest rates.
How credit Card Functions?
A credit card works as a payment tool and a short-term borrowing mechanism. Here's a basic overview of how it operates:
1. **Application:** Individuals apply for a credit card through a financial institution. The approval process considers factors such as credit history, income, and other financial details.
2. **Approval and Credit Limit:** Once approved, the individual is assigned a credit limit—the maximum amount they can borrow using the card. This limit is determined by the issuer based on the applicant's creditworthiness.
3. **Card Issuance:** The financial institution issues a physical or virtual credit card to the individual.
4. **Making Purchases:** Cardholders can use the credit card to make purchases at various merchants, both online and offline. The card contains a unique card number, expiration date, and a security code for security.
5. **Credit Card Statement:** Periodically, usually monthly, the credit card issuer sends a statement detailing all transactions made during that period, the total amount owed, the minimum payment due, and the due date.
6. **Repayment Options:** Cardholders have the flexibility to repay the entire outstanding balance by the due date to avoid interest charges. If they can't pay the full amount, they can make a minimum payment, but the remaining balance accrues interest.
7. **Interest Charges:** If the cardholder carries a balance beyond the grace period (usually around 21-25 days), interest is charged on the remaining balance. Interest rates can vary and are expressed as an annual percentage rate (APR).
8. **Credit Score Impact:** The way a cardholder manages their credit card, including making timely payments and keeping balances low, influences their credit score positively. Late payments and high balances can have a negative impact.
9. **Rewards and Benefits:** Many credit cards offer rewards, cashback, or other perks for certain types of spending. Cardholders can take advantage of these benefits based on the terms of their card.
It's crucial for users to use credit cards responsibly to avoid accumulating high-interest debt and to maintain a positive credit history.