What is a credit card?

Credit cards have not only become an alternative to cash carrying, it has also become a source of identification. It is a thin rectangular plastic card, containing some identification information about a user that authorizes the individual to make charges on a pre-approved account. Credit cards are issued by   financial institutions, and a consumer can purchase goods or services from a merchant on credit up to a pre-approved amount called the credit limit. It has an encoded magnetic strip or embedded microchip on the back that is attached to the credit account and read at the point of sale.

Credit cards offers the individual the ability to either pay the purchase amount in full without incurring interest within a period of time called the grace period or make regular monthly payments. A balance carried from month to month is called a revolving balance. Monthly payments can be greater but not less than the minimum payment based on the annual percentage rate (APR). If a balance is not paid in full before the grace period is over, a credit card issuer can charge interest fees on the unpaid portion.

There are two types of credit card - a secured and unsecured credit card. The type of card

obtained is based on an individual credit rating. A secured credit card requires a deposit equivalent or greater than the credit limit desired. A deposit of $2000 entitles the individual to a credit limit ranging from $1500 to $2000. If an individual is in default, the amount deposited will be used to satisfy the credit card debt.

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An unsecured credit card does not require a deposit and is usually issued to individuals with a good credit history. It is basically a pre-approved loan as known as a line of credit that can be raised or lowered by the issuing bank and is based on the user's performance. The interest rate (i.e. the APR) is also based on the credit history. A good credit history entitles the individual to a low APR.

When applying for a credit card, information about the fees associated with a credit card is located is the Schumer's box. It is however important to read the credit card contract (fine print) as it contains significant information that can change your initial terms and conditions.

Credit cards have their advantages. They provide convenience and credibility amongst others. Its misuse can lead to excessive credit card debt.