What is a Credit Card

What is a Credit Card - What is a Credit Card? A credit...

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• What is a Credit Card? A credit card itself is merely a piece of plastic containing identifying information about a credit account that you (the owner of the card) have established with a bank or other institution. Prior to the development of credit-card lending, most consumer loans were for specific purchases of durable goods, such as homes and cars (as many still are), and the title to these durable goods was held by the bank as collateral. Failing to make payments on your home mortgage or your car loan results in the bank foreclosing and taking possession of your house or your car. Banks have no specific assets that they can seize in response to non-payment of credit-card balances, so they are called unsecured loans. • Credit Cards as Transactions Media Credit cards are also a convenient transactions medium in many situations. Modern communications media have made it possible to order merchandise by telephone or over the Internet. However, it is largely impossible to transmit cash or checks by these media. If you had to send a check by mail every time you ordered something over the phone, your transaction would be no faster than if you ordered by mail. By giving your credit card number over the phone, the merchant need not wait for your check and can send the merchandise immediately. A second advantage of a credit card as a payments medium is that merchants can easily recognize and authenticate the card. If a customer presents a check in payment, the merchant must worry about whether or not the customer actually has sufficient funds in his or her checking account to complete the payment. . • Credit Cards as a Source of Consumer Credit Unsecured lending was riskier for banks than secured lending, so some banks were reluctant to enter the creditcard market. However, once banks learned more about the risks and potential profits, credit-card lending took off. Banks have found ways to manage the risk of their portfolios of credit-card lending. For example, experience has taught them what kinds of default rates to expect from various categories of cardholders. That enables them to tailor interest rates, annual fees, and credit limits to individual cardholders in a way that compensates them for inevitable losses. Moreover, banks that want to reduce their overall holdings of credit-card debt can now do so by
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What is a Credit Card - What is a Credit Card? A credit...

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