View random article

What Is a Credit Card?

A credit card is simply a piece of plastic that consumers can use to pay for purchases. Of course, there are underlying processes and conditions to be met before that piece of plastic can be used, but the basic idea is that you use the card in lieu of cash, with your “promise” that you will pay for the purchase at a later point in time. In short, a credit card works much like a loan, with a few differences.

How does one get a credit card? A bank, or a credit card company, receives applications for a credit card. Based on the details provided in the application, they make a decision as to whether to issue a card or not. These details include the credit rating, credit history, monthly income, and so on. In the approval process, the credit limit is also determined. This limit denotes the maximum amount that the card holder can purchase. If the card holder reaches the credit limit, he will not be able to use the credit card until all or part of the balance - essentially debt - is paid off. In some cases, he might still be able to use the card, but with corresponding charges.

Credit cards have a bad reputation these days, mainly due to astronomical charges that accompany them. Every month, users are billed for their purchases, and if they are not able to pay the bill off in full, they will be charged significant amounts for the remaining balance in the next billing cycle. The interest, finance charge, and other fees do tend to pile up as the months go by, with the credit card holder not realizing just how much debt he has gotten himself into.

Featured in Finance