What Is the Meaning of a Credit Card?

Basics

Credit cards are tied to creditor accounts used by consumers and businesses. Rather than drawing on a checking account with funds available, a credit cardholder draws on a specific line of credit when making a purchase or ATM cash withdrawal, according to the Business Dictionary definition.

A credit card transaction process is much more complicated than what consumers understand from their point-of-sale (POS) experience. The website Virtual School outlines 11 distinct steps in its "Payment Process Overview" from initial POS purchase through actual deposit of funds to the merchant's bank account. Much of what takes place "behind the scenes" in the transaction occurs through third-party payment processors that verify and authenticate the purchase. The card user and merchant typically are concerned with just the original POS transaction and the actual payment of funds that results in debt for the buyer and income for the seller.

Credit card terms vary by card issuer, but common features apply. Interest rates are indicated in the terms overview for purchases, balance transfers, defaults and other types of card activity. These interest rates help you understand the "costs" of using credit card financing, according to the Bankrate.com article "15 must-know credit card terms." Grace periods, often 30 days, are applied to purchases by typical card issuers, according to Business Dictionary. You do not accrue interest if you pay off balances on purchases within the grace period. Monthly minimum payments include accrued finance charges and a portion of principal balance.

"Do a little comparison shopping and you might find a card with the same rate for at least a year or another card with the same deal but no annual fee," suggests Bankrate.com in its article "Finding ideal credit cards." Card issuers offer multiple credit card products designed for consumers with different spending habits and interests. Some cards offer rewards on purchases that are enticing to cardholders accustomed to paying balances immediately. Others offer lower interest rates, which benefit those who maintain balances over time.

Consider the financial impact of relying on credit cards. Your monthly budget is extended by minimum monthly payments. Items you purchase on sale may not be as good of a value if you pay high amounts in interest on them over time. Be aware of the fine print in credit card offers that indicate reasons you might see increased rates and fees.