Credit cards are one of the many instruments of cashless payments. What sets them apart from other cashless modes of payment is the concept of ‘buying on credit’. Simply, a credit card is a payment instrument in the form of a plastic card, issued by a bank or a financial institution, to a cardholder to enable him or her to pay for products or services availed from certain registered merchant establishments with the promise of making the actual payment in the future, up to a certain pre-approved limit. Making a credit card transaction, therefore, entails a commitment on the part of the cardholder or the user to the issuer of the card to repay the dues from purchases as well as any other agreed service or transactional charges as mentioned in the initial agreement.
Usually, this repayment cycle is set up as a revolving account. What does that mean? This means that the issuer of your card, that is a bank or a financial institution, will grant you a certain credit amount up to which you can transact freely on your credit card. This is a pre-approved limit that can allow you to borrow money for payments.
A few terms to understand here:-
The cluster of all cards, including credit card, debit cards, etc is informally referred to as plastic currency for the simple reason that they are a plastic card issued by a financial institution,
Pre-approved borrowing limit:
The credit cards essentially come with a predefined limit up to which you are allowed to borrow. ‘Borrowing’ in the context of credit cards implies that amount for which you can transact in a given period by just swiping your card. The amount of this pre-approved limit is decided by the issuing institution and it depends on two parameters, namely your credit history and your credit score. A higher credit score and a stable credit history imply a higher credit card limit.
How have you performed as a borrower in the past? Were you timely in your repayments? Were you paying the accompanying charges? A rich credit history is important to have a robust credit card limit.
Your credit score is a numerical representation of how easily you can repay the borrowed money. In other words, it quantifies your creditworthiness. The calculation of this score is based on your past performance and your financial standing/health.
How are credit cards different from other cards?
One, credit cards are different from charge cards because the latter requires you to make the repayment of the balance in full each month, whereas the credit card allows you to build up a debt balance, which, subject to the pre-approved limit we just talked about, can be paid within a predefined period of time. Beyond this time, interest is chargeable.
Cash cards or debit cards are also different from credit cards since the element of ‘borrowing on credit’ is largely missing from them. While these are in the nature of direct currency owned by the user, credit cards are in the nature of borrowing.
Benefits of credit cards
The biggest keyword in credit cards is convenience. Every time you make a purchase through a credit card, it is like a small, time-bound loan. So you do not have to worry about checking the available balance as long you are transacting within the predefined borrowing limit. All you have to do is swipe your card to make payments, whether in stores or online. Each credit card payment deducts that much amount from your credit card limit. This is in contrast to a debit card payment where your bank balance is immediately affected by the transaction.
Other benefits of credit cards include offers and reward programs like frequent flier miles. Credit cards often have cashback offers too – whether you are ordering food online, making payment at a restaurant, loading on a new wardrobe.
Credit cards also have different variants to suit different lifestyle needs. make sure you never share your credit card details with anyone.
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