Credit Cards

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What is Credit Cards?

Credit Cards is defined as a card which can be used to obtain cash, goods or services up to a stipulated credit limit. The supplier is later paid by the credit card company which in due course is reimbursed by the credit card holder who will be charged interest at the end of the credit period if money is still owing.

A credit card is basically a plastic card with a magnetic strip invented with the intention to simplify the complicated banking process for an individual in case he/she is short of cash, be it something casual like shopping or something severe like an emergency situation.

This means that using a credit card is effectively like taking-out a loan. That loan must be re-paid to the credit card company (the lender) within the credit cycle (billing is usually every 30 days and thus the credit period can vary from 7 days to 45 days depending on when the purchase was made). If the money is not repaid within this time an interest charge is levied (applied) to the remaining balance.

All the credit card comes with a credit limit, a predetermined amount of money which its lender is offering as credit to a credit card holder to spend wherever he wants to. Before issuing a credit card to an individual, the bank or the financial institution has a look at his/her credit rating alongside verifying his/her credit history.


Origin of Credit Cards

The concept of using a card for purchases was described in 1887 by Edward Bellamy in his Utopian novel Looking Backward. Bellamy used the term credit card eleven times in his novel.110 In the early 1900s, oil companies and department stores issued their own proprietary cards. Such cards were accepted only at the business that issued the card and in limited locations.

Credits cards are a relatively recent development. The VISA Company, for example, traces its history back to 1958 when the Bank of America began its Bank Americard program. In the mid-1960s, the Bank of America began to license banks in the United States the rights to issue its special Bank Americards.

In 1977 the name Visa was adopted internationally to cover all these cards. VISA became the first credit card to be recognized worldwide. Credit cards are relatively new to India.

Andhra Bank and Central Bank of India introduced credit cards in 1981.


Features of Credit Cards

  • Alternative to cash: Credit card is a better alternative to cash. It removes the worry of carrying various currency denominations to pay at the trade counters. It is quite easy and way fast to use a credit card rather than waiting for completion of cash transactions.

  • Credit limit: The credit cardholder enjoys the facility of a credit limit set on his card. This limit of credit is determined by the credit card issuing entity (bank or NBFC) only after analyzing the credit worthiness of the cardholder.

    The credit limit is of two types, viz., normal credit limit and revolving credit limit varies with the financial exposure of the credit cardholder.

  • Record keeping of all transactions: Credit card issuing entities like banks or NBFCs keeps a complete record of all transactions made by their credit cardholders. Such a record helps these entities to raise appropriate billing amounts payable by their cardholders, either on a monthly or some periodic basis.

  • Grace period: The grace period is referred to those minimum numbers of additional days within which a credit cardholder has to pay his credit card bill without any incurring interest or financial charges.

  • Additional charges for delay in payment: The credit card payment is supposed to be made within a due date as mentioned on the bill of a credit card. If payment is not paid on time, then a credit-card issuer charges some additional costs, which are resulted due to delay in payment.

Types of Credit Cards

Credit cards now are of various types with different fees, interest rates and rewarding programs. When applying for a credit card, it is important to learn of their diverse types to know the one best suited to their lifestyle and financial status.

Different types of credit cards available by banks and other companies/organizations are briefly described below.

Gold Credit Card

Gold Credit cards made for higher income groups who also have higher credit rating. It is status symbol and it is considered prestigious. Cash withdrawal limit is higher.

Credit limit is higher provides one Add-on card which can be given to either, spouse, children or parents of the credit card holder provides many privileges such as travel insurance, reward points, cashback offers etc.

Platinum or Titanium Card

Platinum or Titanium Cards are similar to gold credit cards but they have few more additional benefits. Protections against credit card loss and theft, Protection against online fraud transactions, Protection against sickness and injury by an accident. There is no yearly fee.

Silver credit card

Silver credit cards are standard credit cards available and most of the employed people with 4 or 5 year’s experience can own this type of card, Lower membership fees, The applicant need not be a high-salaried person to buy silver card, The interest rate is 0% initially between 6-9 months when transferring account balance from one credit provider to another one.

Secured Credit Cards

Secured credit cards are known as pay-as-you-go cards. Upon opening the account, the card holder deposits a few hundred to a couple of thousand dollars. This determines the card holder’s credit line.

This limit is often based on a percent of the deposit, which is usually 50-100% of what you put into the account. The cards have an annual fee and higher annual interest rates. Most often, these cards are used to reestablish credit. A person can use the card to make small purchases that they can easily repay.

Getting a card with a conversion option makes it easier to switch to a standard credit card, which should be possible after several months of good payment history.

Specialty Credit Cards

Specialty cards typically are offered through affiliations, partnerships, major brand retailers or service providers. Many specialty credit cards share a partnership between organizations that support a social cause, professional organization or an alumni association. A small portion of the purchase goes toward the intended organization.

Prepaid credit cards

Prepaid cards are not credit cards at all, but are used and accepted just like them. The advantages of prepaid cards is that there are no finance charges and they help you avoid debt since all purchases are paid for beforehand. With these cards you determine the credit line by transferring however much money you’d like to have available to spend to the card.

This eliminates the risk of running up credit card debt and makes the budgeting process much easier. Although most prepaid cards do not charge finance fees, other fees may apply, including monthly fees, start-up or application fees, over-limit fees, ATM fees, reload fees and more. Be sure to thoroughly look over the terms and conditions for each specific card before applying

Reward Cards

Many credit cards have reward programs that can influence your spending. The perks may come in the form of cash, points or discounts. Points that accumulate, for instance, can be traded off for free hotel stays, merchandise, air travel car rentals and certificates.

However, these credit cards can come with complex rules, limits and restrictions. The key is to try to make sure that annual fees don’t end up eliminating all the benefits. Rewards cards are typically best for people who pay their balances off every month.


Advantages of Credit Cards

Credit cards hold a very important function in today’s world. Credit cards make life easier, and can be a huge asset when used carefully and responsibly.

Following are some advantages of credit cards:

Record keeping

Credit card statements can help you track your expenses. Some cards even provide year-end summaries that really help out at tax time.

Ease of Purchase

Credit cards can make it easier to buy things. If you don’t like to carry large amounts of cash with you or if a company doesn’t accept cash purchases (for example most airlines, hotels, and car rental agencies), putting purchases on a credit card can make buying things easier.

Protection of Purchases

Credit cards may also offer you additional protection if something you have bought is lost, damaged, or stolen. Both your credit card statement (and the credit card company) can vouch for the fact that you have made a purchase if the original receipt is lost or stolen. In addition, some credit card companies offer insurance on large purchases.

Building a Credit Line

Having a good credit history is often important, not only when applying for credit cards, but also when applying for things such as loans, rental applications, or even some jobs. Having a credit card and using it wisely (making payments on time and in full each month) will help you build a good credit history.

Other benefits

In addition to the benefits listed above, some credit cards offer additional benefits, such as discounts from particular stores or companies, bonuses such as free airline miles or travel discounts, and special insurances (like travel or life insurance.)

While most of these benefits are meant to encourage you to charge more money on your credit card (remember, credit card companies start making their money when you can’t afford to pay off your charges!) the benefits are real and can be helpful as long as you remember your spending limits.


Disadvantages of Credit Cards

Following are some disadvantages of credit cards:

Blowing Your Budget

The biggest disadvantage of credit cards is that they encourage people to spend money that they don’t have. Most credit cards do not require you to pay off your balance each month, so even if you only have 100, you may be able to spend up to 500 or 1,000 on your credit card. While this may seem like ‘free money’ at the time, you will have to pay it off — and the longer you wait, the more money you will owe since credit card companies charge you interest each month on the money you have borrowed

Credit Card Fraud

Like cash, sometimes credit cards can be stolen. They may be physically stolen (if you lose your wallet) or someone may steal your credit card number (from a receipt, over the phone, or from a Web site) and use your card to rack up debts.

High Interest Rates and Increased Debt

Credit card companies charge you an enormous amount of interest on each balance that you don’t pay off at the end of each month. This is how they make their money


Difference Between Debit and Credit Cards

  • A credit card is a ‘pay later product’ whereas a debit card is a pay now product.

  • In case of credit card credit is granted by bank for a maximum period of 50 days. But in case of a debit card, purchase is directly debited to the account of the cardholder.

  • Interest and other charges have to be paid on the credit card but there is no interest accrued against the use of debit card.

  • Opening a bank account and maintaining a minimum balance in the account is not compulsory in the case of credit card. But opening an account and maintaining a required balance is essential for debit cards.

Credit Cards Frauds

Credit card fraud is a wide-ranging term for theft or fraud committed using a credit card or any similar payment mechanism as a fraudulent source of funds in a transaction. The purpose may be to obtain goods without paying, or to obtain unauthorized funds from an account. Credit card fraud is also an adjunct to identity theft. Credit cads fraud are of following types;

  • Cardholders fraud: The most common type of fraud against credit cards is cardholders falsifying applications to get higher credit limits than they can afford to pay, or to get multiple cards that they cannot afford to pay off.

    Those who intend to defraud generally use the multiple-card approach. They give false names and financial data on several (sometimes as many as hundreds) of applications.


  • Stolen card fraud: When a credit card is lost or stolen, it remains usable until the holder notifies the bank that the card is lost most banks have tollfree telephone numbers with 24-hour support to encourage prompt reporting. Still, it is possible for a thief to make unauthorized purchases on that card up until the card is cancelled.

    In the absence of other security measures, a thief could potentially purchase thousands of dollars or rupees in merchandise or services before the card holder or the bank realize that the card is in the wrong hands.


  • Skimming: Skimming is the theft of credit card information used in an otherwise legitimate transaction. It is typically an “inside job” by a dishonest employee of a legitimate merchant, and can be as simple as photocopying of receipts.

    Common scenarios for skimming are restaurants or bars where the skimmer has possession of the victim’s credit card out of their immediate view. The skimmer will typically use a small keypad to unobtrusively transcribe the 3 or 4 digits Card Security Code which is not present on the magnetic strip.

  • Identity theft: There are two types of fraud within the identity theft category – application fraud and account takeover.

    • Application fraud occurs when criminals use stolen or fake documents to open an account in someone else’s name. Criminals may try to steal documents such as utility bills and bank statements to build up useful personal information. Alternatively, they may create counterfeit documents.

    • Account takeover involves a criminal trying to take over another person’s account, first by gathering information about the intended victim, then contacting their bank or credit issuer — masquerading as the genuine cardholder — asking for mail to be redirected to a new address.

      The criminal then reports the card lost and asks for a replacement to be sent. The replacement card is then used fraudulently

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