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Credit Card

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What Is A Credit Card?

A credit card is a payment tool issued by banks or other financial institutions that allows holders to borrow money to pay merchants for goods and services.

Deeper Definition

A credit card is rectangular and often made of plastic or metal. It is a payment tool that banks and other financial institutions issue to customers, granting them a line of credit from which they can borrow money up to a specific limit for the payment of goods and services online or offline. Aside from serving as a tool for making payments to merchants, cardholders can use it to withdraw cash through an ATM or over the counter.

Credit cards allow customers to build a continuing balance of debt until they reach a particular limit. Cardholders must pay back the accumulated debt with accrued interest and other additional charges at a due date. By law, interest on unpaid debt starts accruing at least after 21 days. Cardholders have the option of paying an agreed minimum amount every due date or paying higher than the agreed minimum amount every due date. Different credit card issuers determine how frequent interest accrues, but it is generally either daily or monthly.

There are mainly two types of credit cards:

  • Secured credit cards: With a secured credit card, holders must make a cash deposit which acts as collateral on the account. Usually, consumers with a bad credit history or no credit history opt for secured credit cards to build or rebuild their credit history. Depending on the card issuer, a secured credit card requires holders to deposit 50% to 100% of the credit limit, and if the holder defaults on a monthly payment, the issuer may use part of the deposit to pay the bill.
  • Unsecured credit cards: With an unsecured credit card, holders do not need to deposit approval. It is the most common credit card type and is available to people with fair to good credit history. Card issuers believe people with a fair credit history are most likely to default on payments. As a result, they charge such customers a higher interest rate to make more money upfront if they eventually default.

Credit Card Example

Banks and other financial institutions issue credit cards by partnering with payment processing companies like Visa, Mastercard, Discover, and American Express.

Some brands that are not financial institutions also issue credit cards by partnering with payment processing companies. An example is the Apple Card offered by Apple.

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