What is a Credit Card?

Michael Pollick
Michael Pollick

The plastic credit card with a magnetic strip many people carry in their wallets or purses is the end result of a complex banking process. Holders of a valid card have the authorization to purchase goods and services up to a predetermined amount, called a credit limit. The vendor receives essential information from the cardholder, the bank issuing the card actually reimburses the vendor, and eventually the cardholder repays the bank through regular monthly payments. If the entire balance is not paid in full, the issuer can legally charge interest fees on the unpaid portion.

A credit card.
A credit card.

Individual banking institutions have their own policies when it comes to credit card applications. Customers may seek either a secured or unsecured card, depending on their individual repayment histories, or credit rating. A secured card requires the applicant to deposit an amount of cash equivalent to the credit limit desired. A deposit of $1500 USD, for example, should be enough to be issued a card with a $1000 to $1500 spending limit. If the customer fails to make sufficient payments, the deposited money will be used to satisfy the debt.

The terms of a credit card.
The terms of a credit card.

An unsecured credit card, on the other hand, is generally issued to those who have a good credit history and have demonstrated an ability to repay the accrued debt on time. Credit limits are determined on an individual basis, and may be raised or lowered based on performance. An unsecured card is essentially a pre-approved loan, with interest rates higher than a similar personal bank loan.

Possible scenarios for credit card debt.
Possible scenarios for credit card debt.

The main benefit of any credit card is instant access to more cash than a person may have on hand. A recent college graduate, for example, may have to purchase a business suit for employment purposes. Earning the $200+ USD needed for an average suit could take weeks, and he or she needs the suit in order to earn the income. Putting the suit on a credit card would be the ideal solution; the borrower could repay the balance with his or her first paycheck and few interest charges would accrue.

Credit cards afford people the ability to make purchases on credit, paying the total off on a regular basis.
Credit cards afford people the ability to make purchases on credit, paying the total off on a regular basis.

Credit cards often becomes problematic when the holder accrues more debt than a regular monthly payment can cover. The issuing bank does allow users to carry over balances every month, which is also called revolving credit, but significant interest rates may also accrue on those balances. Missing a scheduled payment can also prompt the bank to raise interest rates on a delinquent account. If a cardholder can only afford to pay the minimal amount due every month, he or she will not be reducing the actual debt incurred. The minimal payments may only apply to the accrued interest. This is a financial spiral many cardholders may experience if they don't use proper spending restraint.

A credit card may be required to make hotel reservations.
A credit card may be required to make hotel reservations.

A credit card does give the holder an immediate credibility for services such as hotel reservations, car rentals and airline ticket reservations. Those without credit cards often have to guarantee their reservations with cash deposits or several forms of identification. Many credit card plans also include insurance coverage for theft or fraud. If a card is reported stolen and then used illegally, the cardholder would not be held responsible for unauthorized charges. A cardholder can authorize other people to use the card for purchases or services, however. Ultimately, the primary cardholder is responsible for all charges placed on his or her account.

Having a credit card is not a requirement for successful living, but even those who only pay for goods or services with available cash often find it to be a convenient form of identification and instant credibility. In order to avoid excessive debt, the holder must decide if the goods or services are worth the added expenses.

Credit cards typically have a magnetic strip.
Credit cards typically have a magnetic strip.
Michael Pollick
Michael Pollick

A regular wiseGEEK contributor, Michael enjoys doing research in order to satisfy his wide-ranging curiosity about a variety of arcane topics. Before becoming a professional writer, Michael worked as an English tutor, poet, voice-over artist, and DJ.

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Discussion Comments

easycures

I was trying to gather information about credit cards. I found it very informative but more important is that Wisegeek is full of informative articles on practically all possible subjects. I wish to make it my homepage.

anon139653

thanks a lot! it's useful.

anon132519

I like the info, keep it up.

anon128359

Thanks very much for the info about the credit card.

anon95249

thanks for the info. it helped a lot.

anon95159

Great article for sure. Thanks.

anon88640

hey written in a very simple way. thanks.

anon85826

they took advantage of me, too. i accidentally lost $350,854 to scammers who said my money would quadruple.

anon81936

it was very useful to me. only now i understood what these cards are for and what is the difference.

anon80268

Good article!

anon69062

Really good. But can you tell me how for example a hotel withdraw the money (e.g. booking fees) from the bank of the credit card?

anon66359

This article is very good and i liked it. please try to explain bit more. thank you

anon61454

I do not like them.

anon44325

This article gives valuable information for the students for making up their projects. Thank you very much.

anon42195

this is very useful information. to tell you the truth, i am an idiot who doesn't know anything in the world. i don't know about finances or how to do things right. a lot of people take advantage of me because i am so dumb.

anon36812

Thank you for the helpful information! learning about credit cards, debit cards, checking & savings accounts has been easier to learn through this website. thank you for making my life easier =)

anon23868

Thank you for this helpful information, i recently got a credit card and wasn't too sure on exactly when best to use it.

anon12432

This is a very helpful article.

anon9820

Really good.......

valuable information for those who are new to credit cards......

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