written by: johnsinit•edited by: Stephanie Mojica•updated: 1/25/2011
Credit card is one of the multiple financial improvements introduced in the modern age, advantages of which are being obtained by the issuer, the holder and the merchants.
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What Is A Credit Card
A credit card is a synthetic card, issued to a consumer, for making payments. It allows him to purchase items and assistance of employed people for various tasks, with the assurance of the owner to recompense subsequently. The originator of the card provides a guarantee that payment will be secure for the services provided, items purchased on credit, or a loan issued to the customer. By the use of a credit card, a user can spend his cash for buying more items, and take advantage of the money provided on loan by the issuer, by paying extra cost in terms of interest levied. Credit cards are provided by banks or credit associations, after necessary scrutiny of the financial status of the applicant.
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How Credit Card Is Used
On purchasing items, the holder of the card provides an assurance that payment will be made subsequently by the issuer of the card, by endorsing the bill, which includes all relevant details of the card. Many business concerns now even take action on oral instructions through the electronic methods such as telephone or internet. The business concerns arrange confirmation of the credit card by electronic methods, including the credit limits and balance available to meet the purchases.
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Payments After Use Of Credit Card
After every month, the issuer of the credit card dispatches an account report including the different purchases made through the credit card, and charges yet to be paid by the owner of the credit card. After verification, the cardholder makes necessary payments either in full or partial payments with appropriate extra charges. Payments can also be made directly from the bank account of credit card holder to avoid delays. Normally no interest is charged if complete payment is made within the month. Interest is charged for the period from the date of purchase to the date when payment is done.
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Temptations By Issuer Of Card
Due to extreme competition in the business of credit cards, the issuers present multiple motivations to the holders, such as reward points, or refund of cash for extra purchases, etc. However, the motivational factors are minor compared to the rate of interest on purchase expenditures. Some of the credit cards charge nominal interest or even no interest
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Problems With Credit Card
Since no instant cash payment is made by the holder of a credit card, apparently it is felt that the items purchased are free of charge, due to which the holder is tempted for excessive unessential purchases, which are not commensurate with the sources of income. Subsequently, at the end of the month when payments are due, the holder may face difficulties in arranging appropriate payments to clear the bills. If complete payments are not made, huge rate of interest is levied and the holder will be mentally extremely disturbed, which will be a cause of tensions.
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Advantages To Merchants
The business concerns reveal their acceptance of credit cards by exhibiting their insignia. Business with credit cards is more reliable and safe, compared to cash or checks, because the issuer of the credit card assures to make payment, and risks involved with the card holder are absorbed by the issuer. Payments by credit card are considered more favorable to the merchants, since stealing of cash by their workers, or loss due to robberies, is eliminated. Furthermore, the merchants face the risk, if checks accepted by them are dishonored by the bank, and such risks are now undertaken by the issuer of the credit cards. Since the risks involved have now been accepted by the issuer of the cardholder, the merchants have to bear extra charges on such transactions by credit cards. However, the merchants are willing to pay extra charges due to the advantages involved, including increase in sales, since holder of credit card can very conveniently make purchases through credit card.
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Fraud With Credit Cards
The expenditures involved in the prevention, or handling of fraud, involved with credit cards is high. When a credit card is lost due to theft, the majority of issuers of credit card will reimburse partial or full amount of the fraudulent transactions, concerning unauthorized purchases. These expenditures will generally be borne by the merchants, if they did not undertake all necessary precautions in this regard. However, if the merchants adopted all the essential security measures, then issuers of credit cards bear all such expenditures on unauthorized purchases.