What is Credit Card Analysis?
Interested individuals perform credit card analysis to find the best credit provider for their needs. A credit card is a plastic card with an identity linked to a specific holder’s accounts. It allows the account holder to spend the available credit balance and pay the outstanding balance later.
When reviewing a credit card application, the credit card-issuing company evaluates a variety of applicant characteristics to determine whether or not to approve the application. The characteristics include the client’s capacity to pay back the credit, past credit history, history of defaults, foreclosures and repossessions, credit scores by rating agencies, etc.
Applicants with a good credit payment history and a stable income can get credit card approval quickly compared to applicants with a history of defaults and poor credit scores.
- Interested individuals can do credit card analysis to find the best credit card issuer and service provider.
- A credit card allows borrows to use the available credit to make purchases and pay interest on the outstanding balance later.
- Lenders set a credit limit for credit card holders, and it prevents the account holder from spending more than is allowed.
How Credit Cards Work
Credit cards act as a form of debt with a specific limit that is assigned by the lender and a payment schedule that the account holder should use to settle the debt. Depending on the amount of credit allowed, the lender charges a monthly interest at a pre-disclosed rate of the available credit balance.
According to a 2016 Gallup Report, three out of every four Americans own a credit card, and on average, every American keeps at least three credit cards. At least 160 million Americans own a credit card, with the average credit card debt per person being approximately $10,000.
Credit Card Offers
There are thousands of credit card-issuing companies in the market today, and such companies provide different types of offers to attract potential clients. Most often, credit card issuers make their offers attractive by providing lower interest rates and higher credit limits than their competitors. In order to remain competitive, credit card companies need to strike a balance between offering attractive terms to potential customers and making a profit at the same time.
For example, a credit card offer of 3% interest rate per month is attractive to customers who are looking for cheap and flexible credit terms. Such an offer beats other credit options offered by commercial banks, which can go as high as 20% in interest.
A lender may also guarantee a 0% interest for the first six months of using the company’s credit card experiencing the company’s credit and terms of service.
Another selling point that credit companies offer is the use of credit card award points. It is a point’s reward system where frequent and loyal customers are gifted with bonuses, discounts, and lower interest rates, helping motivate them to continue using the service in the long term. Although credit card companies create a borrowing habit among consumers, there is little effort from lenders to manage the habit and help customers get out of debt.
Credit Card Limits
The credit card limit is the maximum credit balance that an account holder is allowed to incur at any particular time. The credit limit prevents a customer from spending too much on purchases than they are allowed. For example, a customer with a credit limit of $5,,000 cannot spend $6000, unless they pay off some of the outstanding credit.
When setting a credit limit, the credit card company considers the creditworthiness and the credit payment history of an account holder. Credit card applicants with a low credit score and a history of default may get a rejection or the lender may set a lower credit limit.
Credit card companies may also request a credit report from credit rating agencies to determine the financial health of a client. The credit card issuer uses the information provided to verify the identity of the applicant and the personal information provided in the credit card application form.
Cases of identity theft and fraud against credit card holders is a growing concern around the world, with millions of customers losing money to fraudsters. Credit card-related fraud occurs when fraudsters get access to a customer’s credit card details or steal the physical credit card, with the intention of using the account holder’s personal information to make purchases.
Credit card theft can occur due to a stolen wallet or using an insecure connection that is vulnerable to phishing or hacking attacks. Such cases of fraud may be difficult to monitor unless the customer regularly accesses their credit report and notifies authorities of suspicious activities.
If the fraud goes undetected, credit card holders may be forced to pay credit that they did not actually incur. When reviewing credit card applications, lenders should take preventive measures to prevent identity theft by verifying the details of applicants. Credit card account holders should also be vigilant and not to give out personal information to fraudsters. They should also avoid using their credit card to make online purchases on insecure internet connections.
CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.
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