What is a credit card? Definition and meaning

A credit card is a plastic card that a credit provider issues which customers can use to purchase goods and services on credit. The card issuer pays for the good or service based on the holder’s promise to pay at a later date. Credit cards are convenient ways of making purchases, especially if you don’t have cash handy, don’t want to use cash, or want easy tracking and security.

After a ‘grace period’, interest will start to accrue on the outstanding amount to be repaid.

The card issuer, which is usually a bank, creates a revolving account and provides the cardholder with a line of credit, from which he or she can borrow funds for payment to a merchant or as a cash advance.

Credit cards are different from charge cards and debit cards. With a debit card, the money is debited from the customer’s bank account immediately. With a charge card, the balance must be repaid in full each month.

Credit CardCredit cards and charge cards have been around for the last 100 years.

How credit cards work

When people apply for a credit card, they are effectively applying to borrow money from the issuer. The issuer will check the applicant’s credit history before approving any application. Details on whether the applicant is a good risk will come from a credit bureau.

Applicants with a bad credit history, i.e. a low credit score, may be refused credit.

For those with a decent credit score, the financial institution will set a credit limit, which is the maximum amount the holder can spend using the card.

The issuer will send the holder a statement every month. The statement has details of all the transactions on the card, plus how much is owed. It will also include the minimum payment and the payment due date.

Interest and penalty charges

The majority of cards charge no interest for a limited period. If you manage your account properly, you need never pay any interest. As long as you clear the balance in full when you get your statement, there is no interest to pay.

Experts advise cardholders to pay back more than the minimum shown on the statement. Otherwise, the outstanding balance will grow and start accruing interest.

According to moneysupermarket.com:

“If you make only the minimum monthly payment, it could take many years to clear the debt.”

If you miss a payment or pay back after the deadline, you will usually face a penalty charge. You will also be charged a penalty if you go over your limit. If you run into difficulties, you should contact the card issuer straight away.

Credit cards in circulationCredit cards have become an integral part of most of the economies in the world today. (Source: Statista.com)

The first credit cards

Credit cards appeared in the first quarter of the 20th century. They were made of cardboard or paper, and then embossed metal plates in the 1920s.

At the time, a card was linked to just one vendor, for instance Bloomingdales or Macy’s. It wasn’t until 1949 that the first universal card – Diners Club – came onto the market.

The Diners Club card evolved from the idea that it would be nice to have a card that could be used in more than one place, and which could serve as a substitute for cash or a checkbook.

At first, Diners Club cards were charge cards, i.e. you had to pay off the balance at the end of the month.

By 1958, other competitors, including American Express and the Hilton Hotel’s Carte Blanche came onto the market.

Also in 1958, Bank of America (then a California bank) issued its BankAmericard. In 1966, Bank of America set up a national franchise program where banks across the nation could issue BankAmericard credit cards.

Eventually, in 1976 the franchise was done away with and BankAmericard became Visa.

MasterCard, was the result of several banks in the Northeast of the US that wanted to get together to honor each others’ cards so that people could use them over a wider geographical area.

According to bankrate.com, initially merchants were charged 7% of each transaction price.

Credit card company and networkThe credit card company is the lender, the network is the facilitator.

Credit card company and credit card network

Many people understandably confuse a credit card network with a credit card company.

Credit card companies are the banks (or financial institutions) that issue credit cards to holders and service their accounts.

Credit card networks, however, dictate where the cards can be used, and facilitate the payment process between the credit card issuer, merchant, and holder.

Some card networks, such as Discover and American Express, also issue credit cards. The majority of credit cards on the Discover or Amex networks are predominantly issued by Discover and American Express.

However, a card on the MasterCard or Visa networks could be issued by Wells Fargo, Bank of America, Capital One, Lloyds Bank, Banco Santander, HSBC, or Barclays, but not from MasterCard or Visa.

The world’s four major credit card networks are Visa, MasterCard, American Express and Discover.