what exactly is a credit card?

what exactly is a credit card?

Credit cards are a practical financial tool. They not only simplify purchasing but also confer consumer safeguards, and, when utilized sensibly, they expedite the establishment of a robust credit profile. However, reckless usage of credit cards may adversely impact one’s credit profile and hinder borrowing in the future. A comprehensive understanding of credit cards can facilitate optimal utilization and financial savings. Essentially, a credit card is either a digital or physical card allowing one access to a credit line from an issuing bank. Purchasing using the credit card implies borrowing from the bank to offset the cost, which must be compensated either at once upon receiving the statement or gradually over time. After the credit card approval, the bank allocates a credit limit detailing the maximum amount an individual is allowed to borrow based on their income, outstanding debts, and the amount of credit available on other cards (Gupta, 2023). Payment networks like American Express, Visa, Mastercard, or Discover ensure that a transaction is executed and the merchant duly compensated and charges correctly posted in the consumer account. Although minimal payments might seem convenient, paying the least amount can be expensive due to prolonged interest charges. Conversely, paying the entire balance monthly is economical since it eliminates interest charges due to the grace period. Finally, consumers should understand that debit cards may not offer the extensive benefits of credit cards, even though some may confer rewards. Also, prepaid debit cards may have limitations in the associated costs, potential non-acceptance by other retailers, and lack of access to required services (U.S. Federation for Community Self-Help, 2019).

References

Gupta, N. (2023, May 31). How to Choose a Credit Card: Everything You Need to Know. https://www.nerdwallet.com/article/credit-cards/how-to-choose-a-card

U.S. Federation for Community Self-Help. (2019, March). CCFP Tool #14. Center for Community Finance. https://nacdfoundation.org/wp-content/uploads/2019/09/T14-Debit-Cards-and-Prepaid-Debit-Cards.