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Credit cards are issued by financial institutions (banks and lending companies) that allow you to borrow money when you want to make a purchase. This article will look into the features of credit cards, how they work, the benefits you can expect from having a credit card, and why it makes sense to compare credit cards before applying for one.
A credit card is a plastic card that is issued by financial institutions - usually a bank - to their clients. It allows holders to borrow pre-approved funds at the point of sale as a replacement to cash. A credit card has physical features such as a security chip, card number, magnetic stripe, ultraviolet features, and a three-digit CVV/CVC code. Here is a basic overview of each component.
When you use a credit card to complete a purchase, you're authorising the credit card provider to send the payment to the merchant on your behalf. Merchants are required to verify that the person who is using the card is the rightful owner by asking for proper identification through a signature or their Personal Identification Number (PIN).
Credit cards have a credit limit - or a maximum amount - that any holder can borrow up to during a set month. The limit is determined by the card issuer based on the cardholder's ability to pay and their credit history.
Credit cards let you borrow money at the time of purchase. This is useful when you don't have enough money or don't want to pay the entire cost of a product or service immediately. If you pay off your balance on time, the credit card is like an interest-free loan from the purchase date until the payment due date. Credit cards can now be used to make payments at a store, over the phone, or on the internet.
It is important to differentiate a credit card from a debit card. Both credit cards and debit cards tend to be accepted at the same places. These cards also tend to have the same symbols of the major global payment networks. However, they have one major difference: where the money comes from.
Credit cards give you the ability to borrow money at the point of purchase, which you later pay off with your own funds. Debit cards offer the convenience of credit cards but are linked to a transaction account. For this reason, interest is charged on credit card transactions because money was borrowed from the credit card provider, but no interest is charged on a debit card because no money was borrowed.
At first glance, it's difficult to tell the difference between regular cards, gold/platinum credit cards, and black cards. However, take a closer look and you'll see that the differences can actually be quite significant.
The first feature you'll notice is that gold/platinum and black cards come with higher credit limits. For example, if the maximum credit limit of a standard card is $1000, it can get as high as $100,000 or more for some platinum cards. The limit is even higher for black card holders.
Credit card companies have stricter conditions for approving cards in the gold/platinum and black card tiers. Generally, you'll find that premium credit cards require you to have a high level of annual income as well as a clean credit history.
The general benefits of premium cards (gold, platinum, black) include the following:
These perks come at a cost. The annual fee for a standard card ranges from $50 to $75 depending on your provider. Premium card holders pay closer to $100-150 a year, with some exceptions costing anywhere from $400 to over $1,000. Even if you're eligible for a premium card from your bank, it doesn't automatically mean you should apply for one. It is important to check the specific perks and benefits that each card provides. Frequent travellers, for example, can rack up frequent flier points if they have a premium card.
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