Credit Card A Necessary Evil?

Credit Card A Necessary Evil?

A Credit Card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services.

The issuer of the card creates a revolving account and grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. A credit card is different from a charge card: a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. Credit cards are issued after an account has been approved by the credit provider, after which cardholders can use it to make purchases at merchants accepting that card.

Merchants often advertise which cards they accept by displaying acceptance marks – generally derived from logos – or may communicate this orally, as in "Credit cards are fine" (implicitly meaning "major brands"), "We take (brands X, Y, and Z)", or "We don't take credit cards". When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder indicates consent to pay by signing a receipt with a record of the card details and indicating the amount to be paid or by entering a personal identification number (PIN). Also, many merchants now accept verbal authorizations via telephone and electronic authorization using the Internet, known as a card not present transaction (CNP).

Electronic verification systems allow merchants to verify in a few seconds that the card is valid and the credit card customer has sufficient credit to cover the purchase, allowing the verification to happen at time of purchase. The verification is performed using a credit card payment terminal or point-of-sale (POS) system with a communications link to the merchant's acquiring bank. Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is called Chip in the United Kingdom and Ireland, and is implemented as an EMV card. For card not present transactions where the card is not shown (e.g., e-commerce, mail order, and telephone sales), merchants additionally verify that the customer is in physical possession of the card and is the authorized user by asking for additional information such as the security code printed on the back of the card, date of expiry, and billing address.

Each month, the credit card user is sent a statement indicating the purchases undertaken with the card, any outstanding fees, 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 for details of the US regulations). 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 issuer charges interest on the amount owed if the balance is not paid in full (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, thus avoiding late payment altogether as long as the cardholder has sufficient funds

Advantages of Credit Card:

There are lots of advantages credit cards have. The major advantage of credit cards is that they permit people to make large purchases, such as expensive semester textbooks or those for cars. Also, credit cards can help for emergencies like medical bills caused by accidents. A responsible repayment of credit cards would permit the card holders to fit into middle class American life and, the same time to develop quality spending habits. Additionally, adolescents may develop a basic moral code and stronger ethics while putting face to face credit cards and the societal rules for delayed gratification.

Free credit if used correctly:

Generally Credit Card companies don't charge any fees if money is repaid on time. Most don't charge an annual fee, although some are starting to levy them. If your provider wants to charge you an annual fee consider taking your business elsewhere.

Spend now pay later:

If you pay off the full balance at the end of the month then you've earned 'free' money because Credit Card bills are settled about a month in arrears, the so-called grace period. Time your purchases right and it's possible to get up to 50-60 days of interest free credit.

Purchase Protection

Buy some faulty goods with your credit card and they'll normally be 100% insured for a specific period. Insurance also sometimes offers cover if the item is lost or stolen. It is important to check to see what cover is available because some Cards are far better than others, with some companies offering no protection

Loss Protection

There is far more security for paying for goods with a credit card than with cash. Should your card be stolen it just takes a simple call to your provider who will put a stop on it and issue a new card.

Security

If you lose your Card or it gets stolen you are by law only liable for the first £50 if the card is used by a third party. However your PIN number should be kept safe - the best place is in your head - and not written on the back of the card. Amazingly some people actually do this.

No plastic = No sale

Many purchases these days such as Car rentals or Hotel bookings won't accept your business unless you have a Credit Card. You can of course always settle your bill in cash but the Card is needed as a deposit.

Credit cards eliminate the need to carry large sums of cash If you are away from home without cash, you often can receive a cash advance or have the option of buying traveler's checks with a credit card Places that are suspicious of personal checks often take credit cards.

Credit cards act as a short-term loan if you find something that is a bargain and haven't the cash or balance in your checking account to pay for it. If you move to a new place, credit cards give you purchasing power until you establish yourself as a good risk in a new community. If you charge an item or service that costs $50 or more in Colorado (or within 100 miles of your home) and later discover it doesn't work or has other problems, you can withhold payment from the credit card company if you have attempted to resolve the problem with the merchant. You often get the best rates of exchange when traveling in foreign countries if you use your credit card for purchases and your ATM card to get cash. Check with your card issuers about surcharges before you leave on your trip.

A two to three percent surcharge may eliminate this advantage. Credit cards can help coordinate receipts for tax purposes. Bookkeeping is reduced to one monthly bill as opposed to checks

Disadvantages of Credit Card:

Some people have been swindled by giving their credit card numbers to dishonest salespeople over the phone. It becomes a loan when the credit becomes due and you do not pay for it. Adding monthly interest charges means you pay more for the goods and services.

Consumers often have more than one credit card and each one has a credit limit. When the credit limits for all cards are added up, the total can be in the thousands of dollars.

Consumers can fall into the habit of using credit cards to extend their income. Credit cards are easier to use than applying for loans even when a loan from a credit union, bank or other financial institution may provide the funds at a lower interest rate. Due to easily availability of credit card you tend to spend more than you earn. Interest rates on credit cards are typically much higher as compared to other investment.

Credit card debt keeps on increasing month by month because you have to pay for the current month as well as previous pending dues.

Using a credit card may be a quick and easy way to pay for stuff but this may come at a cost for some. For example:

• Credit card spending is essentially borrowing. Interest will be charged on any purchases made that aren’t paid off when the interest free period runs out.

• Interest charges on these products are often a lot higher than those given by other loan products. This can make even a small debt grow relatively quickly.

• Being given a credit limit to spend often encourages users to spend beyond their means/ability to repay. This leads some into significant debt difficulties and can create an impaired credit history.

It is possible to use a credit card sensibly and not have any difficulties. Responsibility for this, however, is down to the card holder and not the credit card company. You will incur interest if you are unable to repay your balance in full every month.

Interest rates vary significantly so if you can’t afford to clear your debt you should look for a card that offers a competitive rate of interest. The amount you can spend on a credit card is capped so you may not have access to as much money as you expected. Limits of between £300 and £500 are common for those who have never had access to credit before, while those with a good history who have shown that they use cards responsibly are likely to be offered a higher credit limit. That said, because of the credit crunch and rising levels of bad debt, providers are now more cautious about the amount they will lend. So even if you have a good track record with managing credit, you may be offered a significantly lower limit if you apply for a new card

High Interest Charges

One of the biggest disadvantages to using credit cards is the extremely high interest fees charged by the credit card companies. The interest fees are always significantly higher than the cost of obtaining a traditional bank loan. In fact, many credit companies charge as high as 20 percent for any purchases that aren’t paid in full at the end of each month! The high interest charges are what keep the credit card companies in business so you need to check the fees of each particular card before you apply for one.

Temptation to Overspend

Credit cards can be dangerous for individuals who are not good at budgeting. The temptation is very easy to overspend because you don’t need to pay for your purchases upfront. Regardless of how much money is actually in your current account, you can charge purchases up to your maximum credit card limit. Somehow signing a piece of paper at the time of purchase doesn’t always feel like you are actually spending money. This is exactly the mentality that the credit card companies want users to adopt.

Unpaid Balances

By spending more than they can actually afford each month, individuals end up paying very high interest charges each month. Because you are only billed once a month, it is also very easy to forget about purchases you have made using a credit card. You may end up with a very unwelcome surprise at the end of the month once you see just how many purchases you signed for during the past 30 days! Any unpaid balances are charged very high interest rates that can quickly add up. If you continue to pay only the minimum amount, your unpaid balance can often become unmanageable.

Credit Card Fraud

Another common problem with credit cards involves credit card theft. Credit cards can always be stolen meaning that other individuals can start to make charges to your account. Credit card fraud is becoming an increasing problem due to more sophisticated technology.

Nowadays, you don’t even have to lose your physical card for others to make fraudulent purchases. Criminals have devised even more devious methods of obtaining credit card numbers from individuals. This means you may not even realize your card has been compromised until you receive your monthly statement. You need to check every monthly statement very carefully to detect any suspicious charges