A credit card is a type of card that is issued by a bank or other kinds of financial institutions and which allows the card-owner to borrow money. Such money may be used by the cardholder to buy goods and services. Credit cards are issued by financial companies on the condition that the individual will repay the money spent/borrowed and all predetermined and agreed-upon fees and charges. An LOC or line of credit may also be given by the credit card company to the burrower, which can then be used by the person to take money as a cash advance. The limits of credit are set by the credit card provider on the basis of the credit rating of the person.
As compared to other types of LOCs or consumer loans, credit cards come with higher APRs or annual percentage rates. The credit card company will start charging interest on the unpaid credit on the card one month after that amount was charged on the card by the cardholder. Credit cards are one of the most popular modes of payment for different goods and services. Almost all businesses, big or small, permit the use of credit cards for payment of services and products sold by them.
Types of credit cards
Listed below are some common types of credit cards:
- A majority of the main credit cards are issued by credit unions, banks, and other finance companies. MasterCard, Visa, American Express, and Discover are the main partner companies. Most credit cards come with varied incentives that help it differentiate itself from other credit cards and also attract customers. A lot of them come with rewards that are linked to particular interests like hotel rooms, airline miles, cash back, and gift vouchers to key retailers.
- Secured credit cards are a type of credit card wherein the card is secured by the card-owner with a security deposit. The line of credit on such credit cards is limited and a yearly membership fee may also be levied. In most cases, the LOC is limited to the amount of money put up as deposit. Secured credit cards are often used by individuals with poor or limited credit history. The issuing company will refund the deposit to the cardholder after he/she had responsibly and repeatedly used it for some period of time. Such credit cards are also referred to as semi-secured credit cards or prepaid credit cards.
- A secured credit card can help individuals with bad credit to rebuild their credit while ensuring that they do not need to carry hard cash and that they can make purchases over the web. Most companies that issue secured credit cards report the cardholder’s history of purchase activities and payments to all the main credit bureaus. Repeated and responsible use of the secured card by the individual may prompt the card company to extend his/her line of credit or maybe even upgrade him/her to a normal credit card.
- Banks and financial companies are always seeking to safeguard their interests and avoid any situation that may result in writing off bad debt from individuals with increased credit risks. They however also know that people with higher risks may possibly become more responsible and less risky in the future. Therefore extension of credit via a secured credit card not only allows the banks to garner more business but also allows them to gain interest on the credit issued by them and used by the cardholder.
- A branded form of the main credit cards may be issued by a retailer or a store. The main intention of such store-branded credit cards is to enhance consumer loyalty. It is generally easier to be eligible for a store-branded credit card as opposed to a main credit card. It may however be noted that several store credit cards tend to restrict the total amount that can be charged to the card for purchases from the retailer. Stores may additionally offer special discounts to cardholders, special sales, and/or notice of varied store promotions.
- A prepaid debit card is just like a secured credit card. It is a kind of secured payment card where the amount available on the card is equal to the money that the cardholder or someone else deposits into the card account. If the card is linked to a bank account, then the funds available for purchases are equal to the total money present in that bank account.
- An unsecured credit card is a credit card that does not require collateral like a security deposit, etc. Such credit cars come with higher LOC offers and low rates of interest on unpaid amounts. It is the most widely used kind of credit card on the planet.
Credit card usage in the United States
In the US, consumer credit card debt has risen to over $1trillion as of 2018. It is the highest ever in the history of credit card use in the country. Meanwhile the Federal Reserve keeps increasing a key rate which has lead to an all time high interest rate of 17 percent that is levied by credit card companies on unpaid amounts.
Thus, at 17 percent interest, a consumer with a $60,000 debt, which he/she repays in 3 years, will end up paying $17,000 as interest to the credit card company.
People with high credit card debt may follow the below listed guidelines to reduce the credit card burden:
- If you have multiple credit cards, then pay off the card with the highest interest rate. After it is paid off, move to the next card with a high interest rate. Keep doing it till all credit card debt is eliminated.
- If you have good credit history, then find out if you can avail of a zero-percent-interest balance transfer option. It may be noted that the zero percent interest may be valid for a few months or a few years. After that period, interest will be charged on the remaining amount in the balance.
The most important thing that you need to remember about credit cards is not to use them for buying things that you cannot otherwise afford. Also, do not keep any balance on the credit card. Pay it diligently every month and thus avoid paying the insanely high interest charges.