Credit Card: Meaning, Features, Advantages and Disadvantages
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. A credit card differs from a charge card also in that a credit card typically involves a third-party entity that pays the seller and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date.
Meaning of Credit Card:
Credit cards were first introduced by travel agencies and the idea was later picked up by banks. They are made of plastic material and therefore called ‘plastic money’. A card issued by a financial company giving the holder an option to borrow funds, usually at 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.
Features of Credit Card :
- a) Parties : The credit card system has three parties – the bank issuing the credit card; the account holder using the card and the establishments accepting the cards for payment of goods and services sold.
- b) Specific Person : A customer with assured and substantial income and who maintains good account is issued with a credit card.
- c) Size of the Card : The cards are of standard size and thickness.
- d) Details : The details such as name of the cardholder, account number, validity date are embossed on the card so that they can be checked with imprinter machine.
- e) Specimen Signature : The card also bears specimen signature of the card holder
Advantages of Credit Card :
- a) Purchasing : These cards can be used for purchase of goods, getting services from hotels, railway stations, airlines upto a specified limit.
- b) Easy Transaction : The cardholder signs the invoice which is then sent to the bank which in turn makes payment to the seller or provider of services. Later, the bank recovers the money from the account holder. This saves the customers from the trouble and danger of carrying cash with them while travelling.
- c) Other Uses : Some banks even allow withdrawal of cash from their branches. The credit cards can be used for payment of telephone bills or for buying a jewellery.
- d) Increase in Business : The business of the establishment increases and the banks get higher rate of interest or some fee is charged. The establishments accepting credit cards enter into agreement with the banks. The supplier verifies the card with the help of imprinter machine.
In this way credit card is useful to all. It has become a status symbol in India though in foreign countries it has become quite common.
Disadvantages of Credit Card :
a) The high interest rates : Compared to regular bank loans, credit cards have extremely high interes rages. Sometimes this interest rate can be as high as 20% for any purchases that are not paid in full at the end of the month.
b) The illusion of “Free Money” : Credit cards create the illusion of free money and this leads to the temptation to overspend. This makes credit card owners want to purchase things they don’t need. Apparetly signing a piece of paper isn’t the same as paying in cash. People that are bad at budgeting are the ideal customers for credit card companies, and they know it.
c) The Danger of an Unpaid Balance : Because you are only billed once a month it is easy to forget how much you spent that same month. This way many credit card users spend more than they can cover at the end of the month. In just a couple of months of unpaid balances the interest rate can be enough to become the start of a long term debt problem.
d) Credit Card Thef and Fraud : The last but probably most important disadvantage and risk of using credit cards is the posibilty of fraud or theft. There is no need for a modern thief to take your credit card physically, all he needs is some numbers and your money can dissapear from your bank account.
It is important you check each monthly statement to find any clues of fraud