What is a Credit Card? Learn Its History, Definition, Uses, and More
Published: September 8, 2021 | Updated: September 10, 2021 | Posted by: Pierre Salonga | Credit Card
You may already have an idea about credit cards. In fact, you may be considering getting one. Otherwise, you wouldn’t be reading this article.
However, what keeps you from actually getting a card is your lack of working knowledge about it. After all, what we don’t fully know often scares us or makes us anxious. Add to that the credit card horror stories you may have heard from family and friends.
If you’re a credit card newbie, this article’s for you. This will show how practical credit cards are as a budgeting and spending tool. We’ve also laid out the pros and cons of having one so you’ll be able to make an informed decision.
Table of Contents
- From Charge Plates to Plastic Cards: A Brief Credit Card History
- So What is a Credit Card?
- What is a Credit Line?
- How Do You Use a Credit Card?
- How is a Credit Card Different from a Debit Card?
- What is Credit Card Interest?
- Are There Other Credit Card Fees to Cover?
- What are the Advantages of Owning a Credit Card?
- What are the Disadvantages of Owning a Credit Card?
- Final Thoughts
From Charge Plates to Plastic Cards: A Brief Credit Card History
People had been using the concept of credit cards long before the word credit card was coined. For instance, merchants in the 1800s used charge plates and special coins to extend credit to local farmers until they collected profits from harvests and produce.
And in the early 1900s, Western Union started issuing metal plates to its select customers. Such plates allowed customers to delay the payment of the charges that they’d accumulated.
But the modern credit card invention is usually credited to a businessman named Frank McNamara. Frank was dining at a restaurant. But when he was about to pay the bill, he realized that he left his wallet at home. This incident inspired the idea behind the contemporary credit card.
Frank and his business partner, Ralph Schneider, then started the Diner’s Club. The said club offered cardboard cards that people could use as a charge card at partner restaurants. Using the card, customers would just have to pay the restaurant bill in full monthly.
So What is a Credit Card?
A credit card allows you to instantly borrow money from the bank or credit card company with the condition that you’ll pay it back on the agreed upon date. In a nutshell, it gives you the ability to buy something now and pay for it later.
What is a Credit Line?
Each credit card comes with a credit line, which is actually the maximum amount of money that you can borrow. Every time you buy something using your credit card, the cost of your purchase will be subtracted from your credit line. This means that every time you use your card, your credit line goes down.
For you to understand it much more easily, take a look at this example. Let’s say you have a credit card with a PHP 10,000 credit line, and then you buy a pair of sneakers worth PHP 2,000 using your credit card. After the purchase, your available credit line will be PHP 8,000.
But if you use the card again to buy another item worth PHP 1,000, you’ll now owe the bank a total of PHP 3,000. With that, you’ll be left with a credit line of PHP 7,000.
The money that you owe the bank is the “balance.” Using the example above, your balance is PHP 3,000.
However, what makes credit cards more advantageous than a regular loan is that your credit limit will revert to normal after you repay your balance. So, if you pay the PHP 3,000 balance (plus interest and other charges), your credit line will be back to PHP 10,000 again.
How Do You Use a Credit Card?
Before you buy something, make sure that the store accepts credit cards. Once you’ve confirmed this, here are the things that you need to do.
Paying with your credit card at physical stores: At the cashier, you’ll be asked to insert your card into a card reader. Other machines may just require you to swipe your card.
Paying with your credit card at online stores: At the online shop’s payment page, you’ll be prompted to input the following credit card details: card number, expiration date, and the security code (found at the back of the card).
How is a Credit Card Different from a Debit Card?
How you use a credit card and a debit card is almost the same. The difference, however, lies in the source of funds. When you use your credit card, you’re borrowing against your credit line, which is essentially the money of the bank. But when you use your debit card, you pay with the money in your savings or checking account.
What is Credit Card Interest?
When you pay your balance, you’re not only paying back the loan. You’ll also be required to cover the interest.
Credit card interest is the fee that the banks charge you for borrowing their money. Some banks, however, offer zero-interest credit cards. If you happen to get a zero-interest credit card, you’ll enjoy the privilege of not paying the interest on purchases charged for a specific period. Remember, though, that this zero-interest promo also ends. And when it does, the bank’s regular interest rate will take over.
The credit card interest doesn’t only apply to purchases you made. The bank will also charge it for the following:
- Installment plans: When you buy something using your credit card, you’re given the option to pay the loan in monthly installments.
- Cash advance: If you need cash, you can withdraw money from the ATM using your credit card. The cash withdrawn will be subtracted from your credit line. Keep in mind that the cash advance’s interest may be higher than the card’s regular interest rate.
Are There Other Credit Card Fees to Cover?
Credit card fees don’t end with the interest. Depending on your situation or the way you use your credit card, you may need to cover the following major fees.
- Annual fees: This is the credit card membership fee that you pay every year. The amount remains the same no matter how often or rarely you use your card.
- Cash advance: When you withdraw cash from the ATM using the credit card, the transaction will cost you PHP 200.
- Late fees: If you fail to pay the minimum required balance by the due date, the bank will charge you a late fee.
There are more fees to consider, so we encourage you to talk to your bank to learn more about them.
What are the Advantages of Owning a Credit Card?
While you might have heard stories of people freezing their credit card in ice or cutting it into pieces so that they won’t be able to use it, one cannot deny the top advantages that this plastic card offers.
If you don’t have cash on hand, you can simply swipe your credit card to buy what you need, whether offline or online. However, consider using your debit card first. Only use your credit card when you’re absolutely sure that you have the means to pay back the balance.
2. Zero-Interest Loans and Installments
Planning to buy that latest flat screen TV or that edgy mountain bike but can’t pay for it in full cash? You may opt to pay a percentage of the price tag with your cash and cover the rest with your credit card. And if you’re lucky, you may chance upon a zero-interest offer, which will make paying your monthly installments much lighter.
3. Helps Build Your Credit Score
Having a credit card will help build your credit score. For starters, your credit score is the figure that determines how creditworthy or responsible you are when it comes to handling and paying debts.
When you borrow money from lending institutions in the future, they’ll check your credit score first. And if they see that you have a good credit score, they may offer you a loan package with a good interest rate.
Remember, though, that you’ll only receive a good credit score if you always settle your dues on time.
4. Perks and Privileges
Many credit card companies offer customers different rewards, ranging from air miles to loyalty points to cashbacks. The more you spend with your credit card, the more rewards you’ll get.
What are the Disadvantages of Owning a Credit Card?
It’s important to understand that credit cards don’t cause troubles per se. The majority of the drawbacks stem from the cardholder’s attitude and lack of discipline.
1. Creates Unnecessary Debt
Credit cards are easy to use. And if you don’t have self-discipline, you’ll definitely find yourself overspending and eventually drowning in debt.
2. Damages Your Credit History
If you’re building your credit score to apply for a home loan in the future, your unpaid credit card debts will get in the way. This is because unsettled credit card obligations negatively affect credit scores. As such, always prioritize settling your credit card balance to keep your score in the green.
3. Lots of Fees
As mentioned, you’re not only paying interest charges. You’ll also have to cover other fees, ranging from annual fees to cash advance charges. Additionally, the longer your loan term is, the more interest that you’ll need to pay.
Credit cards are a must-have, especially these days when people and businesses have embraced cashless and contactless payments. This tiny plastic card can definitely make life more convenient.
Of course, there’s more to credit cards than what’s discussed above. Along the way, you’ll need to know the different types of credit cards and other advanced concepts, such as debt consolidation, balance transfers, and cost-cutting techniques. But for now, this in-depth credit card primer should give you all the essentials.
If you wish to know more about credit cards, feel free to explore our other articles. And if you’re ready to get one, you can use our comparison tool and apply through us.