Credit Card

Credit Card Banking Finance Consumer Credit Payment Methods Retail ATM Interest Rates Minimum Payment
A credit card is a plastic card issued by a bank or finance organization allowing the holder to make purchases in shops, hotels, restaurants, petrol stations, etc., on credit.
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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.

  • 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

### What does the term ‘APR’ stand for in the context of credit cards? - [ ] Annual Pricing Rate - [x] Annual Percentage Rate - [ ] Accumulated Premium Rate - [ ] Annual Payment Rate > **Explanation:** The term ‘APR’ stands for Annual Percentage Rate, which is the yearly interest rate charged on outstanding credit balances. ### What happens if you pay off your credit card balance in full each month? - [ ] You earn extra rewards points. - [ ] You pay no annual fees. - [x] You avoid paying interest. - [ ] Your credit limit is increased. > **Explanation:** If you pay off your credit card balance in full each month within the grace period, you avoid paying any interest on your purchases. ### What is a minimum payment? - [x] The smallest amount you need to pay to keep the account in good standing. - [ ] The amount due minus fees. - [ ] The entire balance of the credit card bill. - [ ] Half of the total balance. > **Explanation:** The minimum payment is the smallest amount you need to pay by the due date to keep your account in good standing, usually a percentage of the outstanding balance. ### How is the interest on credit cards typically calculated? - [ ] Daily - [x] Monthly based on APR - [ ] Quarterly - [ ] Semi-Annually > **Explanation:** Interest on credit cards is typically calculated monthly based on the Annual Percentage Rate (APR). ### What does the term ‘credit limit’ refer to? - [ ] The maximum amount of cash you can withdraw. - [x] The maximum amount you can charge on your credit card. - [ ] The total amount of interest you can accrue. - [ ] The minimum payment due each month. > **Explanation:** The credit limit refers to the maximum amount that you can charge on your credit card. ### What is one of the primary benefits of using a credit card? - [ ] Guaranteed low-interest rates. - [ ] Automatic bill payments. - [x] Ability to make purchases on credit. - [ ] Earning a fixed interest on deposits. > **Explanation:** One of the primary benefits of using a credit card is the ability to make purchases on credit, which can be paid back later. ### What is a grace period in the context of credit cards? - [x] A period where no interest is charged if the balance is paid in full. - [ ] The time allowed for a late payment. - [ ] The initial time when a credit card is inactive. - [ ] The duration for which the credit card remains valid. > **Explanation:** A grace period is a time period, typically about 21-25 days, during which no interest is charged on new purchases if the previous balance is paid in full. ### What fee is usually higher for cash advances on credit cards? - [ ] Annual fee - [x] Cash advance fee - [ ] Balance transfer fee - [ ] Late payment fee > **Explanation:** The cash advance fee is generally higher, and it also comes with higher interest rates compared to regular credit card purchases. ### What does it mean to ‘carry a balance’ on a credit card? - [x] Having an outstanding balance from one billing cycle to the next. - [ ] Paying off the balance in full every month. - [ ] Closing the credit card account. - [ ] Increasing the credit limit. > **Explanation:** To carry a balance means having an outstanding balance that is rolled over from one billing cycle to the next, often incurring interest charges. ### What term is used for withdrawing money using a credit card? - [ ] Balance transfer - [ ] Minimum payment - [ ] Reward redemption - [x] Cash advance > **Explanation:** Withdrawing money using a credit card is termed as a cash advance and typically involves higher fees and interest rates.

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

Tuesday, August 6, 2024
Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009
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