Credit Card

Definition§

A credit card is a plastic card issued by banks or financial institutions that allows its holder to purchase goods and services on credit. The retailer or service provider receives monthly payments from the credit-card company for total sales made using the card, minus a service fee. Cardholders also receive periodic statements highlighting their transactions, due dates for payments, and minimum payment requirements. Failure to pay the balance within the stipulated period results in interest charges on the outstanding amount. Credit cards can also be used to withdraw cash from ATMs, often with additional fees and higher interest rates.

Examples§

1. Purchasing Groceries: Jane uses her credit card to buy groceries worth $200. She receives a monthly statement and pays the full amount to avoid interest charges.
2. Hotel Booking: John books a hotel stay costing $500 using his credit card. He opts to pay a minimum payment initially and incurs interest on the remaining balance.
3. ATM Cash Withdrawal: Sarah withdraws $100 in cash using her credit card from an ATM. She is charged a cash advance fee and a higher interest rate from the date of withdrawal.

Frequently Asked Questions (FAQs)§

• Q: What is a service charge in the context of credit cards?
  A: A service charge is a fee that the credit card company deducts from the monthly payments made to the retailer or service provider.

• Q: Can I avoid paying interest on my credit card purchases?
  A: Yes, by paying the full balance within the interest-free grace period, generally about 21-25 days after the billing cycle ends.

• Q: What is the minimum payment?
  A: The minimum payment is the smallest amount you need to pay by the due date to keep the account in good standing, typically a percentage of the outstanding balance.

• Q: What happens if I only make the minimum payment?
  A: Making only the minimum payment will avoid late fees but will result in interest charges on the outstanding balance, prolonging the time it takes to pay off debt.

• Q: How is the interest calculated on a credit card?
  A: Interest is calculated based on the Annual Percentage Rate (APR) and is typically applied to any unpaid balance from the previous billing period.

Related Terms§

• Annual Percentage Rate (APR): The yearly interest rate charged on outstanding credit balances.
• Credit Limit: The maximum amount a cardholder can charge on their credit card.
• Billing Cycle: The period between one billing statement date and the next.
• Grace Period: A time period during which no interest is charged on new purchases if the previous balance is paid in full.
• Cash Advance: Withdrawing cash using a credit card, often associated with higher fees and interest rates.

Online References§

1. Investopedia - Credit Card Definition
2. The Balance - What Is a Credit Card?
3. NerdWallet - How Credit Cards Work

Suggested Books for Further Studies§

1. “Credit Card and Debt Management” by Scott Bilker
   ISBN: 978-0964840178
2. “Credit Repair Kit for Dummies” by Steve Bucci
   ISBN: 978-1119522144
3. “Your Score: An Insider’s Secrets to Understanding, Controlling, and Protecting Your Credit Score” by Anthony Davenport
   ISBN: 978-1328948854

Accounting Basics: “Credit Card” Fundamentals Quiz§

Thank you for exploring this comprehensive guide on credit cards! Keep enhancing your financial literacy to make informed and effective financial decisions.