A credit card is a small plastic card that is issued by a bank. Holders of a credit card can buy goods and services using the card and pay later. However, the user has to pay back the amount to the bank within a stipulated period of time, failing which a fine is levied on them. That is, a customer has to pay an interest to the bank if they are unable to pay the loaned amount in time. But do the use of credit cards help in the growth of the economy? In reality, increased usage of credit cards does impact the economy positively. According to Moody’s Analytics, between the years 2011 and 2015, a higher usage of credit cards resulted in a contribution of an additional $296 billion or a cumulative increase of 0.1% in global GDP during the sample time period.
The latest list that has been released shows that the credit card contribution to the economy in the years 2012 to 2015 has not remained static. In 2012, the credit card contributed 0.39 percent to the economy of the United Arab Emirates. In 2015, the contribution was a mere 0.15 percent. Both Argentina and Australia witnessed an increase in the credit card contribution to the economy. The increase was marginal in the case of Argentina, where the figure stood at 0.23 percent, but in 2015 witnessed a slight climb to 0.24 percent.
In the USA, where credit card usage is quite common, there was no contribution to the economy in 2012. As per the figures, in 2012, the contribution to the economy was 0.00 percent but in 2015, it rose to 0.17 percent. The percent increase was quite steep in the United Kingdom. While the contribution was -0.2 percent in 2012, in 2015 it rose to a steep 0.18 percent. In India, the percent growth has remained more or less static. While in 2012, the percent contribution to the economy was 0.5, in 2015 it marginally rose to 0.9 percent.
A credit card, commonly known as plastic money, enables consumers to buy products and services on credit. In this mode of payment, it does not require the customers to carry cash all the time. A consumer just needs to swipe the credit card post the purchase, through which he/she gains a 50-55 days free credit period.At the end of the credit period the bank sends a bill stating the customer’s purchases, amount due, interest charges and the minimum amount payable.
Myths regarding Credit Card:
A common myth that circulates among many people is that credit cards only increase the propensity to spend more. On the other hand, the advocates believe that the credit cards, used in correct fashion, should ease the customer of immediate payments.
Another popular misconception is that the credit period starts from the purchase date. The fact is, the credit period starts from the date
of billing and not from the date of purchase. Date of purchase and date of billing may differ in many cases.
How Credit Card Works:
Credit cards are generally issued by banks to the card holders, after proper scrutiny of their accounts. These cards are also issued by a business, for example, a department store or an oil company that permits the user to purchase products or goods from their stores or franchises on credit. Once the purchase is made, the card is swiped and the customer is given a bill. The customer in turn promises to pay the purchase amount alongwith the interest payment by signing a receipt. At the end of the credit period, the customer receives a statement of the amount due for payment.
Credit Card Configuration:
All credit cards are more or less of same size and shape as specified by the ISO/IEC/7810 standard as ID 1. Normally the card is 85.60*53.98 mm in size. Credit card can be of the following types:
Standard Credit Card- most common type that allows the user to have revolving balance upto a certain credit limit.
Premium Credit Card- offers rewards and incentives to the user over what a standard credit card offers.
Store Credit Card- also called retail credit card, issued by businesses/companies which is meant to be used for their products only.
Secured Credit Card- generally issued to those without a cash history in exchange of a deposit amount.
Credit Card Vs Charge Card:
The main line of division between a credit card and a charge card lies in their methods of payment. In case of credit card, a customer is required to pay a minimum amount at the end of the credit period. However, the bank charges an interest on the unpaid amount.
On the other hand, consumers using charge cards will have to pay the total purchasing amount at the end of the period.
Credit card Vs Debit Card:
Credit card, basically, is a form of borrowing which allows the user to buy items on credit. The user is required to pay a certain minimum amount at the end of the credit period after which bank charges an interest rest on the remaining balance.
On the other hand, the debit card is directly linked to the user’s account. Here, the payment amount is right away deducted from the user’s account, unlike a credit card where there is a free credit period.
Advantages of Credit Card:
Credit Period: Free credit period of 50-55 days makes it easy for the consumers to buy articles or shop in a cashless way.
Mode of Marketing for Brands: Banks issuing credit cards, often tie up with various brands and companies, which provides discount to the credit card holders buying their products.
Online Shopping: Online shopping has become popular overtime because it is quick and reduces effort. Credit card facilitates this mode of shopping.
ATMs: A consumer can withdraw cash from ATM by using credit cards.
Creates Incentives for Buyers: Marketing innovations like providing reward points to buyers on purchases creates incentives for the customers. The consumers can redeem those points later in return of discounts or gifts.
Drawbacks of Credit Card:
High Interest Rates: A major fallout is the high interest charges associated with payment of original amount. It becomes a greater pain to the debtors when the interest rates shoot up abnormally after a certain period of time. Sometimes, it results in bankruptcy of the customers.
Overblown Price for Card Holders: Often card holders are charged above normal prices on account of interchange fees that the merchants have to pay to the banks.
The parties involved in credit card market are:
The Card Holder
The Bank/The Card Issuer
Acquiring Bank (the bank who accepts payments for the merchants)
Independent Sales Organization (ISO- resellers to the merchant)
Transaction Network (transactions via electronic medium)
The Credit Card Association (it sets terms and conditions for the credit card issuers)
Last Updated on : 25th Aug 2016