What is a credit card?

What is Meant by a Credit Card

A credit card is a financial instrument issued by banks and non-banking financial institutions. You can use it to purchase products and services from both online and offline stores, and pay for them at a later point in time. This sums up the definition of a credit card.

However, it is important to note that all credit cards come with a pre-set credit limit. Once you’ve exhausted your credit card limit entirely, you will not be able to use the card for purchases until you repay the amount that you’ve used up on your card. When determining the credit limit for your credit card, the issuer takes into account a host of different factors such as your credit score, credit history and income, among others.

Your credit card issuer also sends you a credit card statement each month, which contains details of your transactions, the amount that you would have to pay, and the due date of payment. It is important to pay the amount as per the statement on or before the due date. If you do not repay your credit card dues, you will be liable to pay interest on the unpaid amount.

How is a Credit Card Different from a Debit Card

So, you now know the answer to the question ‘what is a credit card?’ Let's take a look at the difference between credit card and debit card.

• Origin of Funds

When you use a credit card, you essentially borrow money that has to be repaid. However, when you use a debit card, you basically use existing funds from your own bank account.

• Maximum Limit

Since credit cards come with a limit, your usage is restricted to the pre-set credit limit. On the other hand, with debit cards, there are no such limits and your usage is restricted only by the amount that you hold in your bank account.

• Repayment

With credit cards, you will have to repay the amount that you borrowed on or before the stipulated due date. However, since debit cards use existing funds, you don’t have to make any repayments as such.

• Penalties and Interest

If you don’t pay your dues within the stipulated due date, you will be liable to pay a penalty and interest on the unpaid amount. With debit cards, there are no such obligations.

• Rewards

Credit cards offer exciting rewards, offers, and discounts when you use them for purchases. Although debit cards also offer rewards, they are comparatively fewer.

• Impact on Credit Score

Debit cards have no impact on your credit score. Credit cards, on the other hand, impact your credit score positively or negatively depending on how you use them.

Components of a Credit Card

It is not enough to just know what the meaning of a credit card is. In fact, it is equally important to also be aware of the components that make up a credit card. Here’s a quick look at these aspects.

• Credit Card Issuer’s Logo

The bank or the NBFC issuing the credit card has its logo printed on it along with details about its payment network.

• Cardholder’s Name and Credit Card Number

Your formal name, as registered with the bank, is printed on the credit card along with a 16-digit card number. That said, American Express (AmEx) issues credit cards with only 15 digits.

• Magnetic Strip

The magnetic strip on a credit card contains the credit card data. It is read by point-of-sale (PoS) machines when you swipe your card to pay for a purchase or make any other payment.

• Europay, Mastercard, Visa (EMV) Chip

The EMV chip is a small and square computer chip that can be found on your credit card. Its primary function is to authenticate the card data and produce a unique code for each transaction carried out with the credit card. This makes it difficult for fraudsters to counterfeit your credit card.

• Credit Card Expiry Date

The credit card issued to you is valid only for a set period. Both the month as well as the year of expiry are mentioned on your credit card.

• Signature Box

At the back of the credit card is a box where the cardholder is required to affix their signature.

• CVV Number

The Card Verification Value (CVV) number is a three-digit number that can be found at the back of a credit card. It acts as an added layer of security, especially during online transactions.

Advantages of Using a Credit Card

A credit card offers the following advantages:

• Eliminates the need to carry cash

• Widely accepted as a mode of payment

• Provides hassle-free shopping experiences

• Allows easy cash-withdrawals

• Comes with a host of discounts, offers, rewards, and cashbacks

• Useful in case of financial emergencies

• Helps to improve your credit score

What is Credit Score and Credit History?

Two terms that are likely to come up when you are talking about credit cards are credit score and credit history. This is because the maximum you can spend on the card, i.e. your credit card limit, is mainly based on these two factors. The credit score is a numerical depiction of your ability to honour your debt. In simple terms, it measures how easily you can repay the borrowed amount. Thus, it follows that a higher credit score begets a higher limit.

Credit scores range from 300 to 900 and anything above 750 is considered excellent for availing credit at affordable rates. Credit history, on the other hand, refers to the history of credit payments in the past. If you have been consistent and timely in your repayments, you can get yourself a higher credit limit. It is also a virtuous cycle: honouring your credit card payments in time can help you improve your credit score, thereby increasing your chances of getting approvals on loans or credit cards in the future.

Credit cards intend to make cashless transactions a smooth, hassle-free experience. If you are excited about the opportunities they provide to fund your dreams, you must check out the range of credit cards available on the Finserv MARKETS platform. You can understand the features of each card in detail, compare among your favourite choices, and apply for a credit card in an informed way.