Credit Card

What Is A Credit Card?

A Credit Card is a small plastic card which is given by a Credit Card provider / issuer to an individual. The credit card issuing authority, in effect, assures the individual, that it will lend him a certain amount of money (equal to the credit card limit) to pay other people.

All of the credit cards follow a size standard as specified by ISO 7810, which is 85.60 millimeters X 53.98 millimeters (or ID-1).

So How Does a Credit Card Work?

A credit card is therefore very different from a debit card, because in a credit card transaction, money does not get taken out of the individual’s bank account. It is simply reduced from the total amount that can be lent by the credit card issuer (which is the credit limit) and interest is charged on the total amount used by the individual in a ‘revolving credit’ method.

The individual can then choose to either repay the entire amount due or pay a minimum amount due.

All these things, including the method of calculating the minimum amount due and the rate of interest, the amount of days after which interest will be charged etc. are mentioned and explained in the contract or agreement between the individual and the credit card issuer.

What Happens During A Credit Card Transaction?

Here is the process that occurs when the individual wishes to pay for something using the credit card:

The individual gives his credit card to the merchant who swipes it on a credit card payment terminal or a Point of Sale system. This system communicates with the system of the credit card issuer to ensure that the amount being swiped for is available within the credit limit of the card. If the amount is available the transaction is authorized by the credit card issuing authority. The individual then signs on the receipt, which is his consent to the transaction and that he will pay the credit card issuing authority the amount of the transaction.

Nowadays, some cards also incorporate an extra security measure for such transactions and the card holder has to type in a ‘Personal Identification Number’ or a PIN after the card is swiped.

Alternatively, if the individual is using his credit card over the Internet, he will put in his credit card number and the 3-digit Card Security Code (which is present on the back side of the card) into the website form. The website’s payment gateway then connects with the system of the credit card issuing authority and confirms if the amount is available. If it is, the transaction goes through. These type of transactions are also called ‘Card / Cardholder Not Present’ or CNP transactions.

Each month, the credit card holder then receives a statement which informs him of the transactions that have occurred and the charges that he has to pay which include the total amount due, the minimum amount due, the amount of interest being charged etc.

Again there are many ways in which the individual can make his payment – he can send in a check for the amount or make the payment over the Internet or telephone, depending upon the services provided by his bank or the credit card issuing company.

Credit Cards: Their Popularity, The Criticism and The Risks

Credit cards are quite popular and most people often having several credit cards with them. The idea of credit is essentially a good one for those people who like to purchase things, but may not have the cash amount available with them at that time. The credit facility serves them in such times and they can repay the amount later, in a manner and amount that suits them – either by repaying the entire amount or by paying it in small chunks.

However, one must know that credit cards charge a very high interest rate for the service that they are providing. And depending upon the tendency of the individual towards spending when he / she does not have the money, having a credit card may often turn out to be a curse, rather than a boon.

It has become quite common to come across individuals who have had several credit cards with high credit limits who are now in debt because of spending all the money available on these cards.

The credit card issuing companies have also come under a lot of criticism for inducing individuals to taking their credit cards, because they lure these potential customers by offering them different facilities and higher credit limits.

Apart from the risk of overspending and getting into debt, credit cards are often at risk of fraud. Nowadays there are several unscrupulous people who collect credit card numbers (either by copying the details during an actual transaction or by stealing them from the Internet website databases). These fraudsters then make purchases by using these details and suddenly the credit card holder gets a statement which has transactions which he has not done.

This creates a lot of problems for the card issuing companies as they have to spend time and resources to trace and verify the fraudulent activity and then ensure that the customer does not have to bear the brunt for those fraudulent transactions. This often takes some time, and meanwhile the customer can get quite hassled about making payments.

Thus, we have seen that having a credit card can be either a boon or a curse.