What is credit card, its usage and benefits?
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| Credit Card; Visa |
What is credit card, its usage and benefits?
A credit
card is a payment card issued to users (cardholders) to enable
the cardholder to pay a merchant for goods and services, based on the cardholder's
promise to the card issuer to pay them for the amounts so paid
plus other agreed charges. The
card issuer (usually a bank) creates a revolving
account and grants a line of credit to the cardholder, from which the
cardholder can borrow money for payment to a merchant or as
a cash
advance.
A
credit card is different from a charge
card, where it requires the balance to be repaid 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.
Usage?
A
credit card issuing company, such as a bank or credit union, enters into
agreements with merchants for them to accept their credit cards. Merchants
often advertise which cards they accept by displaying acceptance
marks – generally derived from logos – or this may be communicated in
signage in the establishment or in company material (e.g., a restaurant's menu
may indicate which credit cards are accepted). Merchants may also communicate
this orally, as in "We take (brands X, Y, and Z)" or "We don't
take credit cards".
The
credit card issuer issues a credit card to a customer at the time or after an
account has been approved by the credit provider, which need not be the same
entity as the card issuer. The cardholders can then use it to make purchases at
merchants accepting that card. When a purchase is made, the cardholder agrees
to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a
record of the card details and indicating the amount to be paid or by entering
a personal identification number
(PIN). Also, many merchants now accept verbal authorizations via telephone and
electronic authorization using the Internet, known as a card not present transaction (CNP).
Electronic
verification systems allow merchants to
verify in a few seconds that the card is valid and the cardholder has
sufficient credit to cover the purchase, allowing the verification to happen at
time of purchase. The verification is performed using a credit card payment terminal or point-of-sale
(POS) system with a communications link to the merchant's acquiring bank. Data
from the card is obtained from a magnetic stripe or chip on
the card; the latter system is called Chip and
PIN in the United Kingdom and Ireland, and is
implemented as an EMV
card.
For
card not present transactions where
the card is not shown (e.g., e-commerce, mail order,
and telephone sales), merchants additionally verify that the customer is in
physical possession of the card and is the authorized user by asking for
additional information such as the security code printed on the back of the card,
date of expiry, and billing address.
Each
month, the cardholder is sent a statement indicating the purchases made with
the card, any outstanding fees, and the total amount owed. In the US, after
receiving the statement, the cardholder may dispute any charges that he or she
thinks are incorrect (see 15 U.S.C. § 1643, which
limits cardholder liability for unauthorized use of a credit card to $50). The Fair Credit Billing Act gives details of
the US regulations. The cardholder must pay a defined minimum portion of the
amount owed by a due date, or may choose to pay a higher amount. The credit
issuer charges interest
on the unpaid balance if the billed amount is not paid in full (typically at a
much higher rate than most other forms of debt). In addition, if the cardholder
fails to make at least the minimum payment by the due date, the issuer may
impose a "late
fee" and/or other penalties. To help mitigate this, some financial
institutions can arrange for automatic payments to be deducted from the
cardholder's bank account, thus avoiding such penalties altogether, as long as
the cardholder has sufficient funds.
Many
banks now also offer the option of electronic statements, either in lieu of or
in addition to physical statements, which can be viewed at any time by the
cardholder via the issuer's online
banking website. Notification of the availability of a new statement is
generally sent to the cardholder's email address. If the card issuer has chosen
to allow it, the cardholder may have other options for payment besides a
physical check, such as an electronic transfer of funds from a checking
account. Depending on the issuer, the cardholder may also be able to make
multiple payments during a single statement period, possibly enabling him or
her to utilize the credit limit on the card several times.
Benefits
Benefits to cardholder
The main benefit to the
cardholder is convenience. Compared to debit cards and checks, a credit card
allows small short-term loans to be quickly made to a cardholder who need not
calculate a balance remaining before every transaction, provided the total
charges do not exceed the maximum credit line for the card.
Different countries offer
different levels of protection. In the UK, for example, the bank is jointly
liable with the merchant for purchases of defective products over £100.
Many credit cards offer
rewards and benefits packages, such as enhanced product warranties at no cost,
free loss/damage coverage on new purchases, various insurance protections, for
example, rental car insurance, common carrier accident protection, and travel
medical insurance.
Credit cards can also
offer a loyalty program, where each purchase is rewarded
with points, which may be redeemed for cash or products. Research has examined
whether competition among card networks may potentially make payment rewards
too generous, causing higher prices among merchants, thus actually impacting
social welfare and its distribution, a situation potentially warranting public
policy interventions
Benefits to merchants
For merchants, a
credit card transaction is often more secure than other forms of payment, such
as cheques,
because the issuing bank commits to pay the merchant the moment the transaction
is authorized, regardless of whether the consumer defaults on the credit card
payment (except for legitimate disputes, which are discussed below, and can
result in charges back to the merchant). In most cases, cards are even more
secure than cash, because they discourage theft by the merchant's employees and
reduce the amount of cash on the premises. Finally, credit cards reduce the
back office expense of processing checks/cash and transporting them to the
bank.
Prior to credit cards,
each merchant had to evaluate each customer's credit
history before extending credit. That task is now performed by the banks
which assume the credit risk. Credit cards can also aid in securing a
sale, especially if the customer does not have enough cash on his or her person
or checking account. Extra turnover is generated by the fact that the customer
can purchase goods and/or services immediately and is less inhibited by the
amount of cash in his or her pocket and the immediate state of his or her bank
balance. Much of merchants' marketing is based on this immediacy.
For each purchase, the
bank charges the merchant a commission (discount fee) for this service and
there may be a certain delay before the agreed payment is received by the
merchant. The commission is often a percentage of the transaction amount, plus
a fixed fee (interchange rate).
Article
Source : wikipedia.org
Image
Source : peerlesscredit.com
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