Credit Card Glossary
Credit Card
A credit card system is a type of retail transaction settlement and credit system, named after the small plastic card issued to users of the system. A credit card issuer lends money to the consumer (or the user).
A credit card us bit be confused with a charge card (though this name is sometimes used by the public to describe credit cards), that require the balance to be paid in full each month.
By contrast, a credit card allows the consumer to ‘revolve’ their balance, at the cost of having interest charged. Most credit cards are the same shape and size, as specified by the ISO 7810 standard.
Usually the process of obtaining a credit card works like this –
A user is issued a credit card after an account has been approved by the credit provider (often a general bank, but sometimes a captive bank created to issue a particular brand of credit card, such as American Express Centurion Bank), with which he or she will be able to make purchases from merchants accepting that credit card up to a pre-established credit limit. This means that when a purchase is made, the credit card user agrees to pay the card issuer the amount of the purchase.
Originally the user would indicate consent to pay, by signing a receipt with a record of the card details and indicating the amount to be paid in a personal exchange that involved a paper receipt. However many merchants now accept verbal authorizations over the telephone and also electronic authorization using merchant credit card processing applications on the Internet.
Electronic verification systems allow merchants (using a strip of magnetized material on the card holding information in a similar manner to magnetic tape or a floppy disk) to verify that the card is valid and the credit card customer has sufficient credit to cover the purchase. All of this occurs almost instantaneously, usually in just a few seconds, allowing the verification to happen at time of purchase.
Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, and the total amount owed. After receiving the statement, the cardholder may dispute any charges that he or she thinks are incorrect (see Fair Credit Billing Act). Otherwise, the cardholder must pay a defined minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the entire amount owed.
The credit provider charges interest on the amount owed (typically at a much higher rate than most other forms of debt). Some financial institutions can arrange for automatic payments to be deducted from the user’s bank accounts. This is called a preauthorized payment.
Credit card issuers usually waive interest charges if the balance is paid in full each month, but typically will charge full interest on the entire outstanding balance from the date of each purchase if the total balance is not paid. It only takes one late payment for this to happen and also at a higher interest rate then you originally agreed to pay!