What is a Credit Card

by John_S on August 5, 2010

By definition, a credit card is a plastic card with a magnetic strip or an electronic chip built in it which authorizes its holder to carry out cashless purchases of goods and services up to a limited amount, depending on his or her monthly income and net worth. Credit cards represent a short-term instrument for financing, and interest usually begins 1 month after the card holder has made a purchase. The interest rate is higher than the one that comes with most lines of credit and consumer loans. Because of their wide acceptance, however, credit cards are the preferred instrument for shopping in many of the developed countries.

Whenever you flip your credit card through the reader to make a purchase, the vendor automatically receives the cardholder’s payment details, together with the full amount of money to cover the purchase. The cardholder, on his part, takes a commitment to repay the sum to the credit card company or bank that has issued his credit card. The outstanding balance is paid off in monthly instalments, plus an annual interest rate that is explicitly stated in the credit card contract that the client has signed. In Canada, one can sign up for a credit card with some of the major chartered banks such as the Royal Bank of Commerce, the Bank of Montreal, or the Toronto Dominion Bank or get one from the numerous credit unions and lending companies operating in the country

Credit cards fall in two general categories – secured (or prepaid credit cards) and unsecured ones. Secured credit cards are the upfront choice of many young Canadians, who still do not have a credit record, but who are eager to build one fast. Basically, the credit limit of a prepaid credit card can never exceed the amount of money that the holder has deposited in it. What you earn is what you are allowed to spend. Therefore, lenders tend to issue prepaid credit cards to young borrowers who have little or no experience in managing credit. This type of cards is also suitable for individuals who have bad credit history and want to repair their credit score.

On the other hand, Canadian citizens with a good credit score and stable monthly incomes may apply for some of the different types of unsecured credit cards offered in the country. The credit limit of each unsecured credit card depends on its holder’s total monthly income and his or her net worth. The client’s ability to pay his instalments on time is also taken into account. Many affluent Canadians run into credit card trouble not because they do not have the money to make their monthly payment, but because they simply forget about it and fail to pay on time.

Finally, almost all kinds of credit cards issued in Canada can be used to make online purchases. While the number of e-customers is constantly on the rise, clients still don’t use their credit cards as much as the electronic retailers would like. For this reason, some of the web-based e-tailers feature a toll-free order number, aiming to attract more customers.  It should be pointed that no matter of their use, all cards go with a substantial interest rate, usually as high as 20 percent a year, and some have bulky annual service fees as well. All these factors should be taken into consideration before one files a credit card application.

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