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Credit Card

What is a Credit Card?

A credit card is a plastic payment card issued to users (cardholders). It enables the cardholder to pay a merchant for goods and services based on his promise to the card issuer to pay them for the amounts 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.

Technical Specifications

The size of most credit cards is 85.60 mm x 53.98 mm and rounded corners with a radius of 2.88-3.48 mm. The size of most credit cards is the same as the size of ATM cards and other payment cards, such as debit cards.

Credit cards have a printed or embossed bank card number. The first six digits, called the Bank Identification Number, determine the bank to which the credit card number belongs. The next nine digits are the individual account number, and the final digit is a validity check code. Credit cards have a magnetic stripe conforming to the ISO/IEC 7813. Many modern credit cards have a computer chip embedded in them as a security feature.

In addition to the main credit card number, credit cards also carry issue and expiration dates (given to the nearest month), as well as extra codes such as issue numbers and security codes. Not all credit cards have the same sets of extra codes nor do they use the same number of digits.

Features

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".

Visa, MasterCard, American Express are card-issuing entities that set transaction terms for merchants, card-issuing banks, and acquiring banks.

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 the 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.

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. After receiving the statement, 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 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.

Interest Charge

Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid.

The precise manner in which interest is charged is usually detailed in a cardholder agreement which may be summarized on the back of the monthly statement. The general calculation formula most financial institutions use to determine the amount of interest to be charged is

( APR / 100 x ADB )/ 365 x number of days revolved before payment was made on the account
Where

APR (Annual Percentage Rate) is the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate.

ADB stands for Average Daily Balance.

Financial institutions refer to interest charged back to the original time of the transaction and up to the time a payment was made, if not in full, as a residual retail finance charge (RRFC). Thus after an amount has revolved and a payment has been made, the user of the card will still receive interest charges on their statement after paying the next statement in full (in fact the statement may only have a charge for interest that collected up until the date the full balance was paid, i.e. when the balance stopped revolving).

The credit card may simply serve as a form of revolving credit, or it may become a complicated financial instrument with multiple balance segments each at a different interest rate, possibly with a single umbrella credit limit, or with separate credit limits applicable to the various balance segments. Usually, this compartmentalization is the result of special incentive offers from the issuing bank, to encourage balance transfers from cards of other issuers. In the event that several interest rates apply to various balance segments, payment allocation is generally at the discretion of the issuing bank, and payments will therefore usually be allocated towards the lowest rate balances until paid in full before any money is paid towards higher rate balances. Interest rates can vary considerably from card to card, and the interest rate on a particular card may jump dramatically if the card user is late with a payment on that card or any other credit instrument, or even if the issuing bank decides to raise its revenue.

Grace Period

A credit card's grace period is the time the cardholder has to pay the balance before interest is assessed on the outstanding balance. Grace periods may vary but usually range from 20 to 55 days depending on the type of credit card and the issuing bank.

Usually, if a cardholder is late paying the balance, finance charges will be calculated and the grace period does not apply. Finance charges incurred depend on the grace period and balance. With most credit cards there is no grace period if there is any outstanding balance from the previous billing cycle or statement (i.e. interest is applied on both the previous balance and new transactions). However, there are some credit cards that will only apply finance charge on the previous or old balance, excluding new transactions.

Types of Credit Card

Benefits and Drawbacks

Benefits to cardholder

Drawbacks to cardholders

Benefits to merchants

Costs to Merchants

Security

Credit card security relies on the physical security of the plastic card as well as the privacy of the credit card number. Therefore, whenever a person other than the card owner has access to the card or its number, security is potentially compromised. Once, merchants would often accept credit card numbers without additional verification for mail order purchases. It's now common practice to only ship to confirmed addresses as a security measure to minimise fraudulent purchases. Some merchants will accept a credit card number for in-store purchases, whereupon access to the number allows easy fraud, but many require the card itself to be present and require a signature (for magnetic stripe cards). A lost or stolen card can be cancelled, and if this is done quickly, will greatly limit the fraud that can take place in this way.

Source : WIKIPEDIA

Updated : June 03, 2019