Best Credit Cards
A user is issued a credit card after an account has been
approved by the credit provider (often a general bank, but
sometimes a captive bank created to issue a particular brand
of credit card, such as American Express Centurion Bank),
with which he or she will be able to make purchases from merchants
accepting that credit card up to a preestablished credit limit.
When a purchase is made, the credit card user agrees to pay
the card issuer. Originally the user would indicate his/her
consent to pay, by signing a receipt with a record of the
card details and indicating the amount to be paid, but many
merchants now accept verbal authorizations via telephone and
electronic authorization using the Internet.
Electronic verification systems allow merchants (using a
strip of magnetized material on the card holding information
in a similar manner to magnetic tape or a floppy disk) to
verify that the card is valid and the credit card customer
has sufficient credit to cover the purchase in a few seconds,
allowing the verification to happen at time of purchase. Other
variations of verification systems are used by eCommerce merchants
to determine if the user's account is valid and able to accept
the charge.
Each month, the credit card user is sent a statement indicating
the purchases undertaken with the card, and the total amount
owed. After receiving the statement, the cardholder may dispute
any charges that he or she thinks are incorrect (see Fair
Credit Billing Act). Otherwise, the cardholder must pay a
defined minimum proportion of the bill by a due date, or may
choose to pay a higher amount up to the entire amount owed.
The credit provider charges interest on the amount owed (typically
at a much higher rate than most other forms of debt). Some
financial institutions can arrange for automatic payments
to be deducted from the user's accounts.
Credit card issuers usually waive interest charges if the
balance is paid in full each month, but typically will charge
full interest on the entire outstanding balance from the date
of each purchase if the total balance is not paid.
The credit card may simply serve as a form of revolving credit,
or it may become a complicated financial instrument with multiple
balance segments each at a different interest rate, possibly
with a single umbrella credit limit, or possibly with separate
credit limits applicable to the various balance segments.
Usually this compartmentalization is the result of special
incentive offers from the issuing bank, either to incent balance
transfers from cards of other issuers, or to incent more spending
on the part of the customer. In the event that several interest
rates apply to various balance segments, payment allocation
is generally at the discretion of the issuing bank, and payments
will therefore usually be allocated towards the lowest rate
balances until paid in full before any money is paid towards
higher rate balances. Interest rates can vary considerably
from card to card, and the interest rate on a particular card
may jump dramatically if the card user is late with a payment
on that card or any other credit instrument. As the rates
and terms vary, services have been set up allowing users to
calculate savings available by switching cards, which can
be considerable if there is a large outstanding balance (see
external links for some on-line services).
Low interest credit cards or even 0% interest credit cards
are available. The only downside to consumers is that the
period of low interest credit cards is limited to a fixed
term, usually between 6 and 12 months. However, services are
available which alert credit card holders when their low interest
period is due to expire. Most such services charge a monthly
or annual fee.
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