What Is a Credit Card?

What Is a Credit Card?

What Is a Credit Card?

(Last Updated On: September 26, 2016)

what is a creditcardA credit card is a convenient method of payment providing many benefits to consumers and merchants. When you pay via credit card in a store or online, you are using a sophisticated and reliable worldwide payment system. Merchants pay a fee to access this system and to offer their customers the convenience of using their credit card.

A credit card, such as VISA or MasterCard, allows you to pay for sales or services by borrowing against your line of credit with the credit card company and to make monthly payments on the outstanding balance. A charge card, such as American Express requires payment in full each month of the outstanding balance charged to the account. Today, credit cards serve as an indispensable credit and payment instrument in the United States. In 2003, there were 18.3 billion credit card transactions accounting for $1.71 trillion (Committee on Payment and Settlement Systems, 2005). The popularity of credit cards continues to grow as evidenced by a greater proportion of merchants that accept them and of consumers that carry them. Using a dynamic model, we explore the costs and benefits of credit cards to consumers, merchants, and the credit card network. In this article, we provide answers to the following questions. Consumers find credit cards convenient for making purchases by accessing lines of credit that they may choose to pay off at the end of the billing cycle or pay over a longer period of time. Around thirty to forty percent of consumers pay off their balances in full every month, such consumers are known as convenience users. In the United States, issuers seldom impose per-transaction fees and often waive annual membership fees. Furthermore, issuers may provide incentives such as frequent-use awards, dispute resolution services, extended warranties and low-price guarantees to promote usage. While revolvers usually receive the same benefits as convenience users, they are usually charged for these card enhancements as part of finance charges on their borrowings. Merchants also benefit from accepting credit cards. Merchants benefit from sales to illiquid consumers who would otherwise not be able to make purchases. By participating in a credit card network, merchants generally receive funds within 48 hours. Credit cards provide relatively secure transactions for non-face-to-face transactions as evidenced by the overwhelming use of credit cards for online transactions. Furthermore, merchants not accepting credit cards may lose business to other merchants that do.

However, credit cards are the most expensive payment instrument to accept. According to the Food Marketing Institute (2000), credit cards on average cost supermarkets 72/c per transaction compared to 34/c for PINbased debit cards and 36/c for checks. A significant portion of the cost is due to the merchant discount, the fee that each merchant pays to its financial institution for each transaction. In the United States, merchant discounts generally range from 1.25 percent to 3 percent of each transaction amount and are bilaterally negotiated between merchants and their financial institutions.

What are the advantages of using a credit card?

  • They allow you to make purchases on credit without carrying

around a lot of cash.

  • They allow accurate record-keeping by consolidating purchases

into a single statement.

  • They allow convenient ordering by mail or phone.
  • They allow you to pay for large purchases in small, monthly

installments.

  • Under certain circumstances, they allow you to withhold payment

for merchandise which proves defective.

What are the disadvantages?

  • The ease of using credit cards, combined with impulsive buying,

may result in over-spending.

  • High interest rates, as well as other costs make credit cards a

relatively expensive method of obtaining credit.

  • Lost or stolen cards may result in some expense ($50.00) and

inconvenience.

  • The use of multi-credit cards can get you even further into debt.
  • Fraudulent or unauthorized charges may take months to dispute,

investigate, and resolve.

How Do I Get a Credit Card?

You must complete an application. A credit card cannot be issued unless requested. Issuers often acquire names of consumers with good credit ratings from a credit reporting agency and send the

consumers “preapproved” applications. Card issuers are permitted to mail you an application or a

solicitation for a credit card or to ask you by phone whether you want to receive a card and to send you a card if you say yes. An issuer will consider your employment, current assets, current

debts, and credit history when you apply for a credit or charge card. If you have had a poor credit history, some companies will issue you a “Secured” credit card. The issuer requires you deposit money in an account and allows you to make credit purchases up to the amount on deposit. Consumers who wish to use such plans to rebuild their credit record should make certain that the deposits are held in a protected escrow account.

 

How does a Credit Card work?

When you have been issued a credit card you are given a line of credit. You can make purchases or receive cash advances up to that amount with your card. When you make a purchase, the

merchant gives proof of your purchase to the credit card company and they pay the merchant on your behalf; in effect granting you a loan. The credit card issuer then bills you for reimbursement of the purchase or cash advance amount. You can either pay the balance in full or make payments. The issuer must send you periodic billing statements giving you information on your account which includes the minimum payment due, date it is due, and the periodic interest

rate on unpaid balances.

Can a store charge me more if I use a Credit Card?

YES, but if a merchant charges you more for using a credit or charge card, that fact and the additional amount must be disclosed to you before the sale is made. A merchant can also offer a discount to customers who pay cash.

What are my Credit Card protections?

Federal law protects consumers when they use credit cards. Protections include the following items:

Prompt Credit for Payments: A card issuer must credit your account on the day the issuer receives your payment, unless the payment is not made according to the creditor’s requirements or the delay in crediting your account does not result in a charge.

Refunds of Credit Balances: When you return merchandise or pay more than you owe, you have the option of keeping the credit balance on your account or requesting a refund. To obtain a refund,

write the card issuer. The card issuer must send you the refund within seven business days of receiving your request. Also if a credit balance remains on your account for more than six months, the card issuer must make a good faith effort to refund the credit balance.

Errors on Your Bill: There are specific rules that the card issuer must follow for promptly correcting billing errors. The issuer must furnish you a statement describing the rules when you open a credit card account and at least once a year after that. Many issuers print your rights on their monthly billing statements. You must notify the issuer in writing at the address specified for billing errors within 60 days after the first bill containing the error was mailed to you. The issuer must look into the problem and either correct the error or explain to you why the bill is correct not later than 90 days after the issuer receives your billing error notice. During that period you do

not have to pay the disputed amount or interest on that amount.

Unauthorized Charges: If your credit card is used without your authorization, you can be held liable for up to $50 per card. If you report the loss before the card is used, federal law says the card

issuer cannot hold you responsible for any unauthorized charges. If you have a lost or stolen credit card, report the loss as soon as possible. Most issuers have a toll-free number in service 24 hours.

You should follow-up your phone call with a letter.

Disputes About Merchandise or Services: If you have a problem with merchandise or services that you charged to a credit card and have made a good faith effort to work out the problem with the seller, you have the right to withhold from the card issuer payment for the merchandise or services. If the card you used is a bank card or another card not issued by the seller of the defective

merchandise, you can withhold payment only if the purchase exceeded $50 and occurred in your home state or within 100 miles of your billing address.

 

What Should I do if my Credit Cards are lost or stolen?

Phone the credit card company immediately, and report that your card is lost or stolen. Your monthly billing statement will list the phone number for reporting lost cards. Be sure to get the name of the person you talked to. The issuer will cancel your card so no unauthorized charges can be made on it. To create a record for the company and for your own files, write to the company after you have phoned. Include your name, address, account number, the date you believe the card was lost or stolen, and the name of the person you spoke to when you called the company.

You will not be liable if you notify your issuer that your cards were lost or stolen before unauthorized charges are made. If your cards are used before you report them missing, the most you can be liable for is $50 per account.

Remember…

  1. Make sure you understand the terms of a credit card plan before you accept the card. Review the disclosures of terms and fees that must appear on credit-card offers.
  2. Keep copies of sales slips and promptly compare charges when your bills arrive. Pay bills promptly.
  3. Protect your credit cards and account numbers to prevent unauthorized use. Draw a line through blank spaces above the total when you sign receipts. Rip up or retain carbons.
  4. Do not give out your card number over the phone unless you know the business or unless you initiated the call.
  5. Keep a list of your credit card numbers and the telephone numbers of each card issuer in a safe place in case your cards are lost or stolen.

Interestingly, credit card offers are often part of a wide spectrum of benefits that a customer can receive. Therefore, credit card customers must study in depth the services of different credit card operators to enable him choose the appropriate service that would suit him and the benefits the customer can receive. This is one of the reasons why a great credit card for one person is just ordinary for another. These offers target specific customers and that is the reason one must be careful to pick and choose a credit card.

 

Finding best credit card offers and utilizing the benefits needs a bit of due diligence. Although many credit card operators send reminders and emails regularly, very few people actually go through them due to the flood of data they receive every day. One good habit could be to regularly visit popular credit card sites that line up the best offers of the day. You may be at the right place that could help you choose the credit card offers and services that suits you.

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