Financial Dictionary - Credit cards

Credit cards allow cardholders to make purchases and withdraw cash even if they do not have funds in their account, unlike debit cards. Debit cards purchases are charged to the current account associated with the card immediately. There must be sufficient funds in the account or the payment will be rejected.

There are two payment methods for credit cards:

• Payment at the end of the month
  This is perhaps the most common. All purchases and payments during the month are charged to the cardholder's account at the start of the next month. As with debit cards, the bank does not charge interest.
• Instalment payment
  As their name suggests, credit cards extend credit that can be used to postpone purchases or payments. The bank collects interest with this payment method, as with any credit or loan.

Advantages of credit cards:

• You can pay for your purchases or “treats” conveniently, month by month.
• Credit cards offer various interesting payment options, such as total repayment at the end of the month with no interest or deferred payments tailored to your repayment capacity. This allows you to choose the best option for your situation at the time.
• Many credit cards are associated with commercial establishments such as household appliance, book and technology stores and supermarkets. These often allow customers to buy things in their shops and postpone payment at 0% interest.
• Credit cards usually come with insurance offering some degree of cover. Travel assistance and accident insurance are the most common types of insurance associated with credit cards. This cover applies if the trip was paid for using the card.
• Credit cards are a passport that enable you to pay in businesses all around the world, with complete confidence and security. Although it is hard to believe, in some places - such as the US - debit card payments are not always accepted. Credit cards mean you don't need to carry cash and you can still pay for your purchases while you are travelling, and choose how you want to pay for them: over time or at the end of the month.
• Some credit cards associated with current or salary accounts reimburse a percentage of the money you spend, when the instalment payment method is chosen.

How does a credit card work?

Banks use credit cards to make an amount of money available to the cardholder. The cardholder can use this credit and repay it as established for the card or as they have chosen, depending on the payment method associated with the card. Cardholders can make as many purchases they want until their card's credit limit is used up. The bank then charges the total spent or an agreed amount at the start of the next month. The bank can charge fees and interest if the account does not have sufficient funds at the time of settlement.

Credit cards comprise the following elements:

• Card chip
  This is located on the left of the card and is necessary for security and rapid transactions.
• Magnetic strip
  This occupies the entire width of the back of the card, although its use has now been replaced by the chip and, especially, contactless technology.
• The card issuer.
  This is usually identified by its logo.
• PAN
  This is the card's 16-digit identification number.
• Expiry date
  The month and year when the card expires. This is located under the card number and is needed when making purchases online.
• The cardholder's name
  The card is personal and non-transferable, and, therefore, always displays the cardholder's name.
• The international brand
  Mastercard and Visa are the most common.
• The cardholder's signature
  There is a space for the cardholder to sign the card when they activate it.
• CCV, CVV or security number
  This is a 3-digit number that is needed to make purchases online.