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It is a card issued by banks or financial companies to allow customer to make purchases on credit. It means instead of having funds in your bank account you can purchase the items or services (whether of a small amount or a big amount limited to your credit profile) by using the credit card.
The user have to pay the borrowed amount together with agreed charges and interest after a pre-agreed credit period.
Costs are attached to the use of Credit Cards are:-
- Annual Fee – Charged for the usage of the card every year.
- Transaction Fee - Charged from the merchant at the time of purchase through credit card.
- Foreign Transaction Fee - Fee charged for the purchases made overseas.
- Interest Payments – When credit is not paid well in time.
- Other Fee - Like annual charges, cash advances fee or late payment fee etc.
Following points to be considered while using credit card;-
- APR for purchases are charged on daily basis not yearly basis.
- APR for loan transfers – Few banks are providing this free of costs and few are on the normal rates like original purchases.
- APR for cash advances-It is charged from the day of cash withdrawal.
- 4. Penalty APR - On skipping any payment, higher rate of interest is charged.
Types of Credit Card
Secured Credit Cards
These credit cards are issued against the security of cash deposits from the card holder with the card issuer. Card holder which do not own a good credit payment history are asked to deposit an amount equal to the credit limit of the card they are using. The cash deposited acts like a collateral and secure the lender or card issuer against the payment default. These are not to be treated like debit cards, as when we use debit card money is spent at that time from our account but on the use of secured credit card our deposited money is safe till we make any default in the credit payment.
Unsecured Credit Cards
These cards are not secured by a cash deposit or collateral. Credit limits depends on the income level and credit history. Issuer takes the more risk when he issue the unsecured credit card.
| Pros | Cons |
|---|---|
| Large Amount purchases can be paid in number of EMIs later. | As fund is always available for spending, care should be taken while making use of it so as to avoid the extravagance. |
| Easy and safe to carry credit card then carrying cash. | The ease of using credit cards can cause you to overspend. |
| If credit card is used with responsible care, many important purchases can be made even in the time of short term financial crisis. | High penalty on the missing payments. |
| Many issuers are giving benefit of cash back offers and discount offers on the use of their credit cards. | Blind use of credit card invites high interest thus results in huge debts. |
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