What is a Credit Card? - Definition, How To Use, Advantages

Updated:30 Aug, 2022

The concept of using a card for purchasing was described by Edward Bellamy in the year 1887. He used the term 'credit card' in his novel Looking Backward. No one can successfully able to implement a credit card into the financial system till 1958. In 1958 Bank of America launched the first successful credit card.

Initially, Credit Card was mostly used for air traveling but later it is adopted by other merchants. In the early 20th century, many countries went to a cashless system with the adoption of credit cards. Earlier, credit cards were made of celluloid plastic, then metal and fiber, then paper, and are now mostly polyvinyl chloride (PVC) plastic. However, the chip part of credit cards is from metals.

What is a Credit Card?

Credit is a person's ability to pay a debt on time and it is expressed by the number credit score. It is a payment card issued by a financial institute, it has pre-set transaction limit for doing cashless transactions. Every time you spent from a credit card, you get the bill and you have to repay the bill within a limited period. After a limited period, you have to give an additional amount to the balance.

Understand this with an example, due to the pandemic your classes started online and you want a mobile phone to attend those classes. But it's month's end and you don't have enough money in the bank account. In this case, you can purchase your mobile phone with a credit card and you can pay the credit card bill afterward. With a credit, card bank pays on your behalf of you and later you repay the expenses to the bank. It is a type of loan, but instead of a cash bank gives you a plastic card that has the following structure.

The front part of the credit card shows different details such as the chip which plays an important role in the authentication of the card and running the transaction smoothly. On the back side of the card, there is a CVV (Card Verification Value) number which adds security to the scams. 

The best part of the credit card is that money is not deducted from the bank account it is deducted from the credit card limit. Additionally, you will find different types of credit cards offered by different institutions, you must wisely choose which credit card suits your spending habit.

Advantages of Credit Card

  • Immediate Use: As stated above, if you want to purchase now and want to pay later, you can easily do with the help of a credit card.
  • Cashless Transaction: No worry about carrying cash, you can just go to the store with card payments, and enjoy. With the advancement of digitalization, the use of cards increased.
  • More Secure: In the case of a debit card money is deducted from your savings account but in the case of credit cards, the bank pays on your behalf of you, and your money is saved.
  • More Discounts: With the popularity of Credit Card. Some online shopping websites offer more discounts on credit cards than others. There are different types of credit cards that offer more discounts than a normal credit card.
  • Wide Acceptance: With the expansion of the internet, everywhere credit card is accepted even in local grocery shop also. Credit cards are also acceptable in foreign countries giving more credit points to the user
  • Emergencies: One of the most important benefits of credit cards. In an emergency, if money is not available in a savings account. One can pay with a credit card to meet the requirement.
  • Purchase Protection: Some additional protection is offered by credit cards in case of loss or damage. For this, you have to give a detailed description to the credit card company, and generally, they cover expenses under Rs 50000.
  • Making Travel Easy: There is a wide range of benefits for Credit card holders such as, it gives a beautiful experience through lounge access at the airports or railway stations.

Disadvantages of Credit Card

  • Overspending: Credit Card limits can exceed to a huge extent. According to data, People start making unnecessary expenses. These unnecessary expenses increase the debt of the person and can have a mental headache.
  • Fraudulence: Thieves can take your card information and can make improper use of it. It becomes the responsibility to inform the bank. The more you delay in informing the more the chance that you will lose money.
  • High-Interest Charge: If someone fails to repay a credit card amount within the period high-interest rate is charged to them. This penalty percentage varies from 30% to 40% which is a good source of income for the banks.
  • Cash Withdrawal: Credit Card charge a high fee on withdrawal of the money from the card. Different types of fees will be charged, such as cash advancement fees, ATM fees, etc. Use a debit card for cash withdrawal.
  • Minimum Due: A lot of credit card holders, instead of paying the full bill, pay the minimum due. Due to this, they pay more interest. Interest is added to the remaining amount of the bill and you will fall under the debt trap.
  • Hidden Cost: Credit Card has several taxes and fees. Penalty for late payment, and if you want duplicate statement you will be charged fee, one must also check their Credit Bills as EMI paying the bill, which degrades the credit score.

Credit Card vs Debit Card

Basis of Comparison

Credit Card

Debit Card

Fees

Different types of fees are applicable

Generally, only an annual fee charged

Interest

up to 50 days of interest-free

No interest charge

Withdrawals

Chargeable

Not every time chargeable

Limit

Has a particular credit limit

Has a particular credit limit (Mostly on 24 hours basis)

Privileges

Comes with more discounts, cashback

Comes with less discount, cashbacks

Money Source

Money Borrowed from the credit-issuing company

More deducted from your savings account.

Lastly, the best option will be to be in a safe situation by avoiding unnecessary expenses, where you are unable to repay your credit card bill. Ensure that you only spend on what you can only afford. If you know how to manage your expenses on a credit card, then you must go for it making your debit card usage limited.

Comments(0)

Remember to keep comments respectful and to follow ourDiscuss Privacy Policy
Han Solo

TechnologyWork & CareerBusinessFinanceLifestyleKnowledge

@geeksforgeeks, All rights reserved