Credit Card
Definition
Credit cards are usually issued jointly by financial institutions (such as banks) and credit card associations. Each card has a credit limit, which is the upper limit of its spending amount, allowing cardholders to consume in a " Buy now, pay later" manner. Its functions are similar to those of debit cards, but there are several major differences:
- Cash advances are available for credit cards;
- Credit cards are used in a wider scope;
- Transactions could be completed without depositing money into the credit card account (which is like borrowing from the financial institutions).
Description
Credit Card Transaction Process
- Card issuer issues a credit card to a consumer;
- The consumer presents the credit card (no matter physical card, mobile phone or smart watch) to a merchant as payment for goods or services;
- The merchant submits the transaction authorization to the acquiring bank;
- Acquiring bank will obtain the transaction authorization from the card issuer through the payment system;
- The card issuer confirms the transaction amount to the acquiring bank through the payment system;
- Acquiring bank will settle with the merchant and charge the merchant's processing fee;
- Consumer makes repayment according to the credit card bill.
Benefits and Precautions
Benefits
- Convenience
Credit cards allow consumers who often make large purchases without the hassle of carrying a large amount of cash.
- Discounts
Banks often offer reward programmes to encourage customers to spend more by using credit cards. A new cardholder may receive a welcome gift upon spending with the new card for a certain amount in a specified period.
- Interest-free repayment period
Using a credit card to shop entitles the cardholder to an interest-free repayment period which increases financial flexibility.
- Diversified services
Credit cards are widely used.They also provide diversified services such as Octopus automatic add-value service, online shopping, regular transfers, cash advances, and gift points rewards.
Precautions
- Promote the desire to consume
Credit cards can be used for online shopping, which becomes more convenient than ever. This promotes and enhances cardholders’ desire to consume.
- High finance charges
If cardholders don’t repay the balance by the due date, finance charge and high interest will be incurred( Annual interest rate can be over 30%).
- Influence on credit score
Applying for several credit cards simultaneously may imply the applicant’s urgent needs for money. This may affect his/her credit score negatively.
- Security issues
If a credit card is lost or stolen, it may lead to card fraud and cause financial losses. Besides, using credit cards for online shopping may have a risk of identity theft.
A credit card survey conducted by HKU showed that as at 2014, respondents owned an average of more than 2 credit cards, and the total monthly credit card spending exceeded HK$ 6,000. It reflects that it is common for Hong Kong people to use credit cards as a means of consumption.
Case Study
Credit Card Solves the Problem of Running out of Cash
Little Thrifty dined out with a friend and both of them have insufficient cash to pay the bills. "Are we going to wash the dishes?" His friend said.
"No worries, I can pay with my credit card." Little Thrifty said calmly. Besides, under the Credit Card Rewards Scheme, they can earn reward points for dining at the restaurant, enjoying discounts without the need for washing dishes.
Just for peace of mind, Little Thrifty told his friend that he always settles in full payment of his credit card bill before the due date to avoid paying interest.
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