What is a Credit Card?
A credit card is a simple yet no-ordinary card that allows the owner to make purchases without bringing out any amount of cash. Instead, by using a credit card, the owner borrows funds from the issuing company, which is often a bank, to make purchases whether online or onsite.
In exchange for the credit, the card owner has to return the full amount borrowed within a given period of time to avoid incurring additional charges. Beyond that time, a percentage of the owed balance amount, interest, needs to be paid, along with the owed balance amount.
Credit Card vs. Debit Card
Both a credit card and the debit card are useful tools that give the owners the power to make purchases without taking out some physical bills from their wallets. The two cards also require the signature of the cardholders when making transactions.
Moreover, debit cards can be used to buy at some merchants where credit cards cannot be used. However, there are differences between these two cards, and the most obvious is the source of the funds used for the purchases.
- A credit card uses funds from the bank that is verified using the owner’s credit line. When applying for a card, identification is made in order to create an account with the credit card holder’s name. Meanwhile, the debit card takes the money straight from the card owner’s bank account.
- A credit card holder receives a statement of account each month, detailing the purchases or cash advance loans made on the card. The debit card holder does not receive any billing statement because the money used for making purchases was already taken at the time of purchase from his or her bank account.
- A credit card can incur charges, especially if the amount borrowed is not returned in full within the given grace period. The debit card does not charge any fee because the purchases are paid in real-time through the owner’s bank account.
Types of Credit Cards
There are numerous types of credit cards that are available for use. However, we will stick to the five most commonly used types.
#1 Regular credit cards
Regular credit cards are the simplest type of credit card. They don’t offer perks and rewards. They are ideal for parents who want to provide their children with the convenience of using a credit card.
One benefit of regular credit cards that they have a predetermined credit limit, which allows the user to control their use of the card. Once the purchases have reached the limit, no further purchases can be made, and they will need to make payments first in order to open up the card again.
#2 Balance transfer credit cards
This type of card is an option offered to those who have a balance on existing cards. The debt is paid off with the new card and the owner pays the debt to the new card at ideally lower interest rates.
#3 Student credit cards
A student credit card is specifically designed for individuals who need a credit card but do not have a credit history yet. It requires a higher approval rating compared to standard or regular cards.
#4 Charge cards
Charge cards are beneficial in the sense that they do not charge interest or fees simply because the balance needs to be paid in full at the end of every month. However, in the event of a failed payment, charges are made, or the card may be revoked, depending on the terms and conditions set by the financial company.
#5 Subprime credit cards
This type of card is considered to be among the worst and most scheming type of cards, as it targets individuals with a bad credit history. Its fees are exorbitant, but people still use them because of the lack of choices and opportunities to open a credit line elsewhere.
Even if there are already federal laws regulating the fees subprime credit cards can charge, they seem to find ways and loopholes that let them continue their scheme.
Best Card to Use
People with credit cards will agree about how easy it is to make purchases with it. In fact, it is so much easier than using a debit card. However, between the two, using a debit card is still better and safer because of the fact that it charges no interest and the user will never go beyond his means.
Meanwhile, below are several instances when using the credit card over the debit card is better:
#1 Renting a hotel room
The credit card is a better option here because it also allows the hotel to charge further any room service or food ordered by the cardholder.
There are many credit cards that offer rewards such as travel incentives or free miles and cash-back rewards.
#3 Cash-less transactions anywhere
When traveling, it is not only inconvenient but also unsafe to bring cash everywhere. Using a card is less bulky as travelers don’t need to bring bills around.
#4 Emergency payments
Making unplanned payments is perhaps the best part of owning a credit card – having the power to make emergency payments even in the absence of cash. One example is an accident or a trip to the emergency room.
Credit cards are useful tools for making purchases. However, users must be extremely careful because overusing them may bring them deep into a debt hole. Responsible usage should always be practiced.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep learning and advancing your career, the additional CFI resources below will be useful: