What is in a Credit Card?
Credit Card
A credit card is a plastic payment card that lets you borrow money from your bank or credit card company, to pay for items at stores, restaurants and other places that accept credit cards. A credit card can also help you build credit, which can make it easier to get loans and mortgages in the future. However, it’s important to know how a credit card works so you can use it responsibly and avoid going into debt.
A bank or credit card company loans you a certain amount of money, called a line of credit, and you’re allowed to spend up to that limit. When you make a purchase, the card issuer logs that transaction and adds it to your monthly statement along with a list of all previous transactions. If you don’t pay off the full amount due by the end of each billing cycle, you’ll be charged interest on your outstanding balance.
The back of a credit card contains a magnetic stripe that stores data, which is then used to make point-of-sale purchases. Some cards also have a small chip, known as an EMV chip, that encrypts the card’s information more securely. Many credit cards also feature a contactless symbol that allows you to tap the card on a compatible reader instead of inserting it or swiping it.
What is in a Credit Card?
When you get a new credit card, the bank will often assign a credit limit based on your current spending habits and income. This limit can change over time as you establish a credit history, and it can be affected by your creditworthiness. You can also increase your limit by applying for a credit extension, which is like an additional loan on top of your existing balance. To do this, you’ll typically have to provide proof of your income or assets and agree to pay a higher APR.
Credit card companies earn most of their revenue from interest expenses, which are charges for borrowing money to finance your purchases. They lend out the money they receive from you at a lower rate than what it costs them to borrow capital at other banks, and then add on a profit margin that reflects their operating expenses.
Other types of credit card fees include transaction fees imposed on merchants, and annual or renewal fees. Some cards, such as those for people with bad credit, may also charge a security deposit, which is usually equal to the total amount of your outstanding balance. A security deposit can be used to cover unpaid balances if you fail to pay on time, though your card issuer will not withdraw the deposit without a good reason.
Some credit cards offer rewards programs that let you earn cash back or points on your purchases. These points can be redeemed for gifts, statement credits or deposited into Frequent Flyer accounts. Some credit cards also allow you to move debt from other cards, a process called a balance transfer, to avoid paying interest on the old balance for a set period of time.