What is Credit Card?
Credit Cards are also known as “Plastic Money” and they work as currency notes. A person can do shopping, can pay bills, purchase tickets and much more work can be done via Credit card just similar to currency notes. A Credit card is issued by the financial institution or through banks on the terms which enable a cardholder to borrow funds from the institution. The cardholder should pay back the money to the institution with interest within the given period. Nowadays, credit cards are mostly used by many people as they lower the burden of carrying money. One can travel anywhere by taking the credit card in the pocket and can buy anything and anywhere he/she may go! Therefore, people prefer Credit cards more than money. Also, there is no tension of running out of money during the shopping or any other expenses as the cardholder can spend any amount of money and pay it later to the institution.
Understanding A Credit Card
A credit card is issued by the financial institution in the form of a thin plastic or metal piece which is in a rectangular shape. A person can borrow funds in the pre-approved limit, decided by the institution. A credit card can be issued based on your Credit Score and the History of your Bank Account. Higher is your credit score, the higher will be the limit provided to you by the institution. It typically charges a higher Annual Percentage Rate (APR) as compared to other consumer loans. The functions and the structure of Credit cards areas similar to Debit cards but they differ from each other in all aspects. The institution provides some limits to the Credit card users and also allots some money according to the users’ credit score and history such as Rs. 10,000, Rs. 50,000, Rs. 1,00,000, and so on so that a user can use this money from its credit card as a kind of loan which he/she should pay back with some interest decided by the institution at a particular period. A credit card is a better option to do online transactions such as online shopping, paying bills online, booking hotels, tickets, holiday packages, etc. as it doesn’t allow you to pay extra charges and interest to the institutions or banks with the benefits of providing some discount offers as well. whereas, if a person withdrawal cash from his credit card then there he/she may have to pay some interest for it which is not a good option for you. Therefore, people refer the credit card for online transactions and payments.
History of Credit Cards
Here is a brief explanation of the history of credit cards which the historians conclude on their researches. Let’s have a look at it.
Credit Cards in the Early Forms
Thousands of years ago, Merchants helps their customers with their finance purchases by the use of credit cards, such as the seeds were sold to the farmers in the condition applied to them that the payments were made from them after their harvesting period.
The code of Hammurabi, was one of the earliest written examples of a credit system that was named after the famous ruler of Babylon from 1792 to 1750 B.C, It is now Iraq. The rules for paying back the money, taking a loan, and how the interest could be charged were established under this system.
In the late 19th and the early 20th century, many companies found the idea of generating revolving a credit card as a physical object that could help the merchants to identify their customer’s account easily. Many developed it in the form of a coin or a medal which also included the name and logo of the merchant as well as the account number of the customer.
In the year 1930, the merchants converted these coins and medals in the new form of metal rectangular cards which were named as Charge-Plates which looked similar to the present-day credit card. Then the consumers start using these Charge – Plates for purchasing items. But few things were missing in this rectangular metal card before the invention of the modern payment card.
Then in the year 1940s and 1950s, The Air Travel Card allowed their travelers to purchase tickets on the credit from different airlines. And in the year 1950s, the Modern Payment Card was created by Frank McNamara and Ralph Schneider who founded the Diners Club which was the first charge card in general purpose. But, it requires the consumer to pay full and each month’s statement balance.
The final innovation was made by American Express that offered the customers the option of carrying the balance on their cards. This innovation created the financial product that is recognized as a modern credit card.
The Evolution of the Credit Card Technology
In today’s standards, magnetic stripes are now considered primitive. The information stored in it is not even encrypted. The embedded computer chips in the credit cards are making the magnetic stripes so obsolete. The EVM Smart Chips which is also known as computer embedded chips allows two ways of authentication which is between the payment processing network and the merchant’s credit card. This technology was widely used in Europe for the last 2 decades.
However, as wireless payment technologies are rapidly integrated into the smart-watches, smartphones, and also in the other platforms. Some industrialist experts have suggested that the technology of EVM Smart Chips is relatively for short period.
Now finally, we are in the era where with the help of Biometric authentication, or retinal scan one can start purchases. Therefore, it is being a long way of using the metallic coins to make charges through purchases and now it is observing that the credit card in the wallets will soon get disappeared as well.
Features of Credit Card
The main key features of the Credit card which most people value are listed below:
- Many credit cards offer their users big sign-up bonuses. These kinds of bonuses are being provided in travel-related credit cards.
- There are no charges included with the annual fees with most of the credit cards. Besides that, some reasonable fees must be charged in different criteria.
- If someone is paying their bills after their due date, then the company can raise your interest rate to 25% or more as a penalty.
- If occasionally, someone is carrying a balance in the credit card to clear it off and not able to pay the carrying balance then one must favor the credit card with the interest rate which is relatively at the lower range than others.
- If one is looking for a good credit transfer card, then one should aim to get the card that will charge you no interest in the period ranges between 15-20 months as the longer period will be better. But one must choose the time according to their suitability.
- A credit card helps you to save a lot of money by traveling abroad with it or just by making online payments from foreign countries-based retailers.
- A credit card also works like a credit boosting tool as many companies facilitate you to access your credit score and most of the card companies also print it on your bill every month.
- A person can also earn cashback prizes or points and rewards by making payments and purchases through a credit card.
- Some travel credit cards also provide the facility to its users to access the VIP Lounges and free bags checked at the airports.
- Many credit companies also offer to extend the card’s warranties if one qualifies its purchases.
Benefits of Credit Cards
Owning a credit card has many benefits in your hand associated with it. Credit cards are the better alternatives to cash and for this reason, they are accepted globally. Here are some benefits which make it the people’s first choice are given below:
- With a credit card, one can move around the world freely and can easily access anywhere without caring about the currency conversions.
- Having a credit card can increase your purchasing power as you can purchase more by borrowing money instantly.
- The credit card is a kind of loan one can take immediately through their wallets, which also offers many attractive rewards on your purchase.
- The shopping experience with credit cards is undefined as one can make big purchases without hitting their monthly budgets. The credit card also allows its consumer to buy products on low-cost EMIs. As the credit card works on the principle of “buy now and pay later” which gives a better option to salary-based consumers.
- The credit card is an alternative to cash as it eliminated the need for cash. Nowadays, one doesn’t overburden themselves by putting in a huge amount of money while traveling or shopping but carries their credit card to serve anywhere as one can easily swipe it at any sales or bills machine and also use it as the online or net banking to make their payments easily.
- The credit card also provides special discounts and offers such as cash-back offers, or reward as points for the purchases which are made through the card.
- As similar to a debit card, a credit card also allows the withdrawal of cash in case of emergency by charging a small number of fees on it. Many institutions also provide rewards points in doing the cash withdrawal through credit cards as well.
- A credit card can be accepted worldwide. The users can pay their bills and payments easily anywhere and anytime with access to credit cards and without worrying about foreign transactions.
- In case of meeting a medical or hospital emergency, you don’t need to arrange any funds as by using the credit card one can pay the bills easily through it.
- Many companies of credit cards also help you to take the advantage of building your credit scores. If one person is having a credit card and also pay its credit on time then the institution will surely improve your credit scores which often helps you to take a loan or more credit card facilities.
Disadvantages of Credit Card
Some disadvantages of using a credit card are listed as under:
- A credit card established credit-worthiness.
- It also encourages unnecessary wants and impulsive purchases.
- Credit cards also provide a higher rate of interest if not pay the credit full by its due date.
- Over years, annual fees for some of the credit cards can become more expensive.
- Credit cards also charge some fees on their late payments.
- It can also provide a negative impact on the credit scores in case of not using it properly.
Difference Between Credit Card and Debit Card
The debit card and credit card look similar to each other and are both issued by banks but the features are different in both cards. There is the difference between debit and credit card which are shown below:
|Credit Card||Debit Card|
|It allows a person to borrow money for the purchase of goods and services.||It deducts money from the savings or current account directly.|
|One can extend its credit in a short period of time.||The source of money is your savings bank account or current bank account.|
|One can spend more money than he/she may have.||One can spend only a limited amount of money he/she has.|
|The company of the credit card pays the money to the vendor for the purchase done by you then you have to pay the credit card company.||You have to pay yourself for your purchases.|
|One will get a billing statement with every detail of the person for each transaction.||There is no bill or statement provided in it.|
|It has multiple fees applicable which include joining fee, annual fee, payment fee, and others.||There are only annual fees and regeneration fees applicable.|
|One can enjoy the rewards such as cash-back offers, discounts, air miles, etc. which can be redeemed easily.||There are only limited rewards.|
Frequently Asked Questions
Q1. How should I use the Credit card?
Ans. You may go to the shopping mart or a store and have to use a credit card there, you should insert your card in a swipe machine at the time of checkout. While shopping online, you have to provide your card details such as your card number, the expiry date of your card, and the CVV CODE which is printed on the backside of your card. By providing these details carefully you can enjoy the use of the credit card with few simple steps but you must make sure to secure your credit card from fraud.
You should also take care to pay your bills at the given time. And also gain some knowledge to calculate interest on the card. You must also look after the credit card charges. Most importantly, you should always keep an eye on your balance.
Q2. What are the negative impacts on your CIBIL due to credit cards?
Ans. A credit card has a direct impact on your credit score or your financial life as the higher credit score can provide the low risks of default and in reverse, the low credit score will provide the high risk of default. As per the CIBIL, a person with a credit score of at least 750 points can get the faster loan approvals and the credit scores of a person should be 300 – 900. 7 reasons can directly impact your credit scores: One must not miss the due dates of its payments.
- You should maintain a healthy credit ratio of utilization.
- You should not increase your credit card limit frequently.
- You should make sure that all of your loans are closed properly.
- You must maintain an error-free credit report.
- It is better to read the credit report first, before applying for the loan.
Q3. Which are the Top 5 Credit cards in India?
Ans. The top 5 credit cards in India are:
- HSBC Visa Platinum Card.
- HDFC Freedom Credit Card.
- Yatra SBI Credit card.
- HDFC Bank Diners Club Black.
- Citi Cash Card.
Q4. What are the functions of the credit card?
Ans. The credit card performs the following functions:
Function 1 – The system of the credit card spreads the use of metallic money. It works as a promissory note in the exchange of goods and services.
Function 2 – It also minimizes the transaction of cash as it can exchange easily and remittance.
Function 3 – It is also helpful in the production.
Function 4 – It also promotes foreign trade.
Function 5 – It also facilitates financial accommodation to the industries.
Q5. Are credit cards safe to use?
Ans. Yes, of-course credit card relies on the physical security of the card and as well as the privacy is also there for the credit card number. Somehow, if any other person wants to access your card he will be failed due to the high privacy provided in the credit card, and security is also potentially compromised. The Payment Card Industry Data Security Standard Council (PCI DSS) is the security standard that issued the data security of the card.