Credit cards are another popular form of payment systems. They allow consumers to extend their purchasing power. As a result, these cards are often used for large purchases, when the customer might not have enough cash on hand to complete the transaction.
A credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder’s promise to pay for them. The issuer of the card creates a revolving account and them. 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 a small plastic card that has a magnetic strip on the exterior. The magnetic strip carries some form of encoded information about the card number and may be encrypted making it difficult for potential thieves to decode or copy the information onto another card. A card reader is required to read as well as write the information to the magnetic strip.
Traditionally, the credit cards were used as off-line means of payment. But today, with the growth of internet users, they have been widely accepted as on-line payment mechanisms as well.
Today, credit cards are the dominant form of payment on the web. Their electronic nature allows consumers and e-commerce stores to pay and receive payment immediately.
While cheques and money order payments might take days to complete, credit card payments take only seconds. As a result, credit cards account for the majority of online transactions.
To make a credit card transaction truly secure and non-refutable, the following sequence of steps must occur before actual goods, services or funds flow:
1.A customer presents his or her credit card information (along with an authenticity signature) securely to the merchant.
2.The merchant validates the customer’s identity as the owner of the card account.
3.The merchant relays the credit card charge information and signature to its bank or online credit card processors.
4.The bank or processing party relays the information to the customer’s bank for authorization approval.
5.The customer’s bank returns the credit card data, charge authentication and authorization to the merchant.
Credit cards are the most convenient way to make online payments. They work around the globe, regardless of the location or the country of the issuing bank.
The issuer issues the customer a credit card after verifying his credentials. The issuer may or may not charge a one time or recurring processing fee from the customer. The vendor has apply to the acquirer for the permission to accept one or more card brands.
In off-line use of a credit card, the customer presents his credit card to the vendor in exchange of goods\service he wishes to purchase. The vendor verifies the validity of the credit card by sending the credit card information to the acquirer.
The request is then passed over to the customer’s issuer, which may be a bank or a financial institution. The issuer verifies the information and returns the authorization to the vendor through the acquirer.
The vendor then accepts payment is later redeemed to the vendor by the customer’s issuer through the acquirer and the customer is debited for the amount which he has to pay.
Characteristics of Credit Cards:-
The main characteristics or features of credit card are listed as follows:
1.Alternative to cash:-
Credit card is a better alternative to cash. It removes the worry of carrying various currencies to pay at the different trade counters. It is easy and fast to use a credit card rather than waiting for completion of cash transaction, Credit card helps a cardholder to travel anywhere in the world without a need to carry a large amount of cash. The risk of money theft is also reduced.
The credit cardholder enjoys the facility of a credit limit set on his card. This limit of credit is determined by the credit card issuing entity (bank or NBFC) only after analyzing the credit limit is of two types: normal credit limit and revolving credit limit.
Normal credit limit is the used credit given by the bank NBFC at the time of issuing a credit card. Revolving credit limit varies with the financial exposure of the credit cardholder.
3.Facilitates payment in domestic and foreign currency:-
Credit card gives its holder a unique facility to make payments either in domestic (native) currency or if necessary, also in foreign (non-native) currency as per requirement.
Credit card reduces the cumbersome process of currency conversion i.e. it removes the financial complexities often encountered in converting a domestic currency into a foreign currency. Using this feature, a credit cardholder can easily make payments to merchants present in any corner of the world.
4.Record keeping of all transaction:-
Credit card issuing entities like banks or NBFCs keep a complete record of all transactions made by their credit cardholders. Such a record helps these entities to raise appropriate billing amounts payable by their cardholders, either on a monthly or some periodic basis.
Regular charges are basic routine charges charged by the credit card issuing entity on the usage of credit card by its cardholder. The regular charges a are primarily classified into two types- annual charges and additional charges. Annual charges are collected on per annum or yearly basis.
Additional charges are collected for either supplementary service provided by the credit card issuing entity such as add-on-card, issue of a new credit card, etc.
The grace period is referred to those minimum numbers of additional days within which a credit cardholder has to pay his credit card bill without any incurring interest or financial charges.
7.Higher fees on cash withdrawals:-
Credit card issuer makes charges on cash withdrawals made through credit card at the ATM outlets and other desks. Generally, cash withdrawal fees are quite higher than fee charged by the bank or NBFC for the other regular credit transactions. On cash withdrawn done through a credit card, interest is from the someday i.e. interest is charged since the day on which cash is withdrawn.
8.Additional charges for delay in payment:-
The credit card payment is supposed to be made within a due date as mentioned on the bill of a credit card. If payment is not done on time, then a credit-card issuer charges some addition costs, which are resulted due to delay in payment. These charges are charged to compensate the interest cost administration cost and any other related costs bared by credit card issuing entity.
Service tax is included in the total amount charge to the credit cardholder. This mandatory service tax imposed by the government also increases the final end cost bared by a credit cardholder. Many credit card providers have policies of reversing the service tax charged on the purchase of gas, fuel and other similar goods.
10. Bonus points:-
Because of the competition among the credit card providers, various incentives are offered to customers in a trendy way to improve the sale of the products in the ordinary course of business. Credit card providers also give bonus points on the financial value of the transactions compiled by their customers.
11.Gifts and other offers:-
At a later stage i.e. after crossing pre-determined number of bonus points, accumulated bonus points are redeemed either by converting them into gifts, cash back offers, or any other similar compelling offers. To collect many bonus point, the credit cardholder has to carrey our a considerable number of transaction through his credit card.