Reaching for a piece of colored plastic every day in your wallet, it would be hard to believe that the concept of a “credit” card dates back to the 1880s.
Owning a card builds awareness of financial “freedom”, shopping comfort both online and in traditional stores, and sometimes adds prestige. It may be issued massively and allows a carefree evening out in the city is not a sign of special status, but the Platinum Card from American Express certainly does.
What is a “credit” card?
However we perceive the card, we must remember that its primary purpose is to facilitate payment transactions. Facilitation, and thus the acceleration of the process of settling amounts due for purchased goods and services. The result expected by card issuers is to encourage their holders to make frequent purchases.
It is not difficult, because what we are able to perform the given operation, the more often we repeat it. Is it profitable to have a credit card if it is to encourage shopping? This question should be answered by everyone. Plastic is, however, made available to adults, suggesting that they are able to be responsible for the way they spend their money.
The card meant that the lack of cash in the wallet ceased to be a (temporary) problem. Non-cash transactions have become the dominant way of settlements. The use of cards carries a portfolio of benefits apart from the obvious lack of having to carry cash. One of them is even the ability to settle payments for purchases only on the repayment date (i.e. sometimes almost 2 months after the transaction).
Another option, however, is to make instant payments for online purchases. Additional, accident and liability insurance or assistance may be another standard, which is becoming more and more often. Card issuers, in an effort to attract customers, develop card products in various ways, which ultimately benefits consumers. It should be remembered, however, that regardless of how the card is promoted and what services it contains, it is always a form of loan that the bank gives us.
Credit or debit card?
The range of all types of cards offered by financial institutions can be overwhelming, especially when we care about the simplest product that allows cashless purchases. Payment cards work differently and this is related to the specificity of the product they support.
Simply put, credit cards act as an interest-free loan (as long as the commitment is repaid on time), debit cards allow you to settle liabilities to your bank account, while prepaid cards allow purchases up to the amount that was assigned to them. Apart from charge and prepaid cards, the two most common forms of payment cards are credit and debit cards.
How exactly does the credit card work?
When choosing a credit card, the user uses the bank’s money to make payments for purchased goods or services. This situation means that the credit card is not associated with a personal account. For a potential user, this means that before the bank grants the credit card, it will probably verify its creditworthiness.
There is, in principle, no wonder, because the credit card, as the name implies, is a form of credit provided by the bank. When determining creditworthiness, the bank determines the risk level and defines the amount of debt the credit card used will be able to repay.
On this basis, it grants a credit limit up to which the user will be able to use the card every month. The rule is that liabilities due to the use of a credit card are repaid after receiving a bank statement along with information on the debt balance. The card’s great advantage is the ability to pay its debts almost 2 months after the transaction.
What is a debit card?
As we have just mentioned, the general rule is that when using a debit card product, the holder makes payments up to the amount of funds that have been accumulated on the bank account. This means that a debit card transaction can only be carried out up to the amount of money in your bank account.
In principle, because if the card user has a bank overdraft or so-called a revolving loan, then it can use more funds than those on the invoice. So we can see that the main difference between a credit card and a debit card is the fact that the latter is linked to the holder’s bank account.
Analyzing the scope of functions assigned to the credit and debit card, we can see that in most cases they are very similar. This means that it can be used to withdraw cash from an ATM as well as to make payments for purchases in stationary and online stores.
How to use cards?
The answer is obvious. The same as for all products provided by loan institutions. So with head and common sense.
First, you need to look at the product’s regulations, its specificity, and then compare it with the nature of the transactions carried out. If we intend to withdraw cash from an ATM often, then the optimal solution will be to use a debit card. This is the most logical one because remembering about its special nature, we know that funds will be taken from our account. As a result, we will avoid potential commissions.
In a situation where we also have a credit card, it would be a good idea to use it to complete most non-cash transactions. On the one hand, we again come across the commission aspect, or rather its absence. On the other hand, we can afford shopping even when the level of our resources on a personal account could be insufficient.