Credit Card: Definition, Usage, Types and Advantages

You must have come across the option of paying with a credit card at payment gateways, both online and offline. You might also be getting promotional calls from various companies for taking a credit card from their company. In short, a credit card is not something you might be reading about here for the first time. But, do you understand what is a credit card and how it functions? Have you ever calculated whether taking a credit card would be a good financial decision for you or not? Even if you own a credit card, was it an informed decision for you? Or did you just get one because someone convinced you for it? In this write-up, RiseMoneyWise are providing you with all the important information about credit card so that you can make informed decisions.

What is a Credit Card?

Definition: Credit Card is a debt instrument i.e. an instrument one can utilize to obtain a loan.

Talking practically in layman’s terms, credit card is a rectangular plastic card, issued by a bank or other financial institution, that allows the cardholder to borrow funds and make a payment for goods and services to merchants who accepts card payments.

When you use a Credit Card, you use the money that you don’t own. The money comes from the issuer of the card as a loan that you have to pay later. Whether you pay any interest or charges upon the card, depends on the already agreed-upon terms between you and the issuer. The borrowing limits per Credit Card are pre-set by the issuer and generally depend on the credit rating of the cardholder.

Types of Credit Card

All types of Credit Card basically provide the same facility: they let you use the money that you don’t own. But, there are different types of Credit Cards depending on the special purpose for which they are issued and the types of terms and conditions applied on those cards.

Types of Credit Cards based on Security Terms

Based on the terms of security deposits credit cards can be divided into two broad categories.

Secured Credit Cards – This is the kind of credit card where the cardholder has to secure the card with a security deposit. This type of card let the user take limited lines of credit. This line of credit is equal in value to the security deposited by the cardholder.

Typically, secured credit cards are given to persons with poor credit histories. The security amount is normally returned to the cardholder after the demonstration of repeated and responsible card usage over time.

Unsecured Credit Cards – This is the kind of credit card where the cardholder does not require to deposit any security amount or any collateral for the matter. These cards are provided to users with a good credit history. These cards provide higher lines of credit and typically charge lower interest rates on the loan as compared to secured cards.

Types of Credit Cards Based on Their Special Purposes

There are no fixed numbers or categories of credit cards when it comes to their categorization based on their special purpose. Here, we are providing a list of the common types of special-purpose credit cards.

Travel Credit Cards – These are credit cards that can be used only for travel purposes and nothing else. These can be used to book airline, bus, or train tickets or book cabs, etc. Cardholders are given rewards on every purchase and reward points may be used for any future traveling expenses. This type of card is very useful for frequent travelers.

Fuel Credit Cards – These are used to avail of fuel surcharge discounts. A person can get discounts and other benefits when they use a fuel credit card to purchase fuel.

Reward Credit Cards – As the name suggests, these cards are used to earn heavy discounts and reward points with every purchase or transaction. Many people use these cards to cut down their monthly expense budget. Some credit card providers also provide reward credit cards with the name shopping credit cards.

Business Credit Cards – These cards are meant for businesses looking to build their business credit score. These cards allow businesses to purchase ‘related’ items and pay for services like social media advertising and also provide attractive offers on the same.

Student Credit Cards – Some companies provide credit cards to college students at a much-discounted rate. These cards provide many offers that are attractive to students as these offers are designed specifically for them.

Benefits of Having a Credit Card

By now, it must be clear to you that credit cards come with many facilities. Depending on your needs, one can save money while transacting with a credit card. We are listing down the top benefits of using a credit card.

Hassle-Free Shopping Experience – A credit card can be a life savior if you are someone who loves shopping. With a credit card, you neither need to count cash nor do you need to check your bank balance before making any transaction.

Attractive Offers – Credit cards provide attractive offers like low-cost EMIs, gift vouchers, rewards, cashback, etc. However, different credit card providers offer differing benefits for using their cards. So, it is imperative to compare different credit card offers to choose the best according to your use.

Worldwide Acceptance – You cannot pay in your country’s currency outside the geographic boundary of your country. But, this is not the case with credit cards. Credit cards are widely accepted and are one of the most common modes of payment across the world. One can use credit cards for international bookings of flights, hotel stores, and fuel stations.

A Help in Emergency – As credit cards let you use the money you don’t own, they can be used in times of emergency. You do not need to ask for loans from your family and friends when you have a credit card unless your emergency need does not exceed your credit card limit.

Improving Credit History – Many people use credit cards not just to purchase things now and make payments later but to build their credit history. Credit history is the record that shows whether a person habitually repays the debts on time or not. You must know that the credit history of a person is drawn from various sources and not just credit cards. But, credit cards can be intentionally used to improve the credit history and CIBIL score of a person.