Define Credit Cards –
A credit card is a payment card that allows the cardholder to borrow money from the issuer, typically a financial institution or bank, to make purchases or withdraw cash. The cardholder is then required to pay back the borrowed amount, plus interest, at a later date.
The business behind credit cards is based on the issuing institution extending a line of credit to the cardholder. In return, the issuer charges interest on the borrowed amount and various fees such as annual fees, late payment fees, and cash advance fees.
Additionally, many credit card issuers also generate revenue through merchant fees, which are charged to merchants for accepting credit card payments.
How does a Credit Card work?
The working of credit cards is as follows:
- The cardholder applies for a credit card from a financial institution or bank and is given a credit limit if approved.
- The cardholder can then use the credit card to make purchases or withdraw cash up to the credit limit.
- The cardholder must make a minimum payment each month, which typically includes a percentage of the outstanding balance plus any fees and interest charges.
- The card issuer sends a monthly statement with the cardholder’s account information, including the outstanding balance, minimum payment, and due date.
- If the cardholder makes the minimum payment by the due date, they can continue to use the credit card. If they fail to make a payment, the issuer may charge a late fee, and the cardholder’s credit history may be negatively impacted.
In summary, credit cards allow consumers to access credit, allowing them to make purchases or withdraw cash, which they will have to pay back with interest and fees. At the same time, credit card issuers make money from interest, fees, and merchant services.
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