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Banking Products

Banking Products

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Published by Disha Jaisinghani

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Published by: Disha Jaisinghani on May 17, 2011
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05/17/2011

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A
credit card
is a small  plasticcard issued to users as a system of  payment.It allows its holder to buy goods and services based on the holder's promise to pay for thesegoods and services.
The issuer of the card creates a revolving accountand grants aline of credit to theconsumer (or the user) from which the user can borrow money for   payment to amerchantor as acash advanceto the user. A credit card is different from a charge card: a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject tointerest  being charged. A credit card also differs from acash card, which can be used like currency by the owner of the card.Like most things, there are advantages and disadvantages to credit cards. Knowing someof these can help you decide if you do or do not want to use credit cards.
Advantages
Purchase Power and Ease of Purchase - Credit cards can make it easier to buythings. If you don't like to carry large amounts of cash with you or if a companydoesn't accept cash purchases (for example most airlines, hotels, and car rentalagencies), putting purchases on a credit card can make buying things easier.
Protection of Purchases - Credit cards may also offer you additional protection if something you have bought is lost, damaged, or stolen. Both your credit cardstatement (and the credit card company) can vouch for the fact that you havemade a purchase if the original receipt is lost or stolen. In addition, some creditcard companies offer insurance on large purchases.
Building a Credit Line - Having a good credit history is often important, not onlywhen applying for credit cards, but also when applying for things such as loans,rental applications, or even some jobs. Having a credit card and using it wisely(making payments on time and in full each month) will help you build a goodcredit history.
Emergencies - Credit cards can also be useful in times of emergency. While youshould avoid spending outside your budget (or money you don't have!),sometimes emergencies (such as your car breaking down or flood or fire) maylead to a large purchase (like the need for a rental car or a motel room for severalnights.)
Credit Card Benefits - In addition to the benefits listed above, some credit cardsoffer additional benefits, such as discounts from particular stores or companies, bonuses such as free airline miles or travel discounts, and special insurances (liketravel or life insurance.) While most of these benefits are meant to encourage you
 
to charge more money on your credit card (remember, credit card companies startmaking their money when you can't afford to pay off your charges!) the benefitsare real and can be helpful as long as you remember your spending limits.
Disadvantages
Blowing Your Budget -- The biggest disadvantage of credit cards is that theyencourage people to spend money that they don't have. Most credit cards do notrequire you to pay off your balance each month, so even if you only have $100,you may be able to spend up to $500 or $1,000 on your credit card. While thismay seem like 'free money' at the time, you will have to pay it off -- and thelonger you wait, the more money you will owe since credit card companies chargeyou interest each month on the money you have borrowed.
High Interest Rates and Increased Debt -- Credit card companies charge you anenormous amount of interest on each balance that you don't pay off at the end of each month. This is how they make their money and this is how most people inthe United States get into debt (and even bankruptcy.) Consider this: If you have a$100 in savings, most banks will give you at the most 2.0 to 2.5% interest on your money over the course of the year. This means you earn $2.00 - $2.50 a year onyour $100 savings. Most credit cards charge you up to 10 times that amount of interest on balances. This means that if you have $100 balance that you don't payoff, you will be charged 20-25% interest on that $100. This means that you owealmost $30 interest (plus the original $100) at the end of the year. A good way tolook at this is in comparison to what you would earn in interest from a bank or owe in interest to a bank loan: Savings accounts may pay you around 2% interest;if you have a loan from a bank you may pay them around 10% interest (5 times asmuch as you earn off your savings); if you owe money to a credit card company,you may pay them around 20% interest (10 times as much as you earn off your savings.)
Credit Card Fraud - Like cash, sometimes credit cards can be stolen. They may be physically stolen (if you lose your wallet) or someone may steal your credit cardnumber (from a receipt, over the phone, or from a Web site) and use your card torack up debts. The good news is that, unlike cash, if you realize your credit cardor number has been stolen and you report it to your credit card companyimmediately, you will not be charged for any purchases that someone else hasmade. Even if you don't realize your credit card number has been stolen(sometimes you might not know until you receive your monthly statement), mostcredit card companies don't charge you or only charge a small fee, like $25 or $50, even if the thief has charged thousands of dollars to your card. There areseveral things you can do to prevent credit card fraud:
o
If you lose your card or wallet, report it to your credit card companyimmediately.
o
Don't loan your credit card to anyone and only give out your credit cardinformation to trusted companies or Web sites.
o
Check your statement closely at the end of each month to make sure allcharges are yours.
 
o
You can find out more about protecting your personal information byvisiting our Personal Safety course.  Credit cards can make life easier and be a great tool, but if they aren't used wisely theycan become a huge financial burden. If you do decide to use credit cards, remember thesesimple rules:
Keep track of all your purchases.
Don't spend outside your budget.
Pay off your balance on all of your credit cards at the end of each month.
Don't loan your credit or give out your credit card information to anyone butreliable companies
How to Open/Apply for an Account
Often times, you will be approached by credit card companies to apply for a card (either  by mail, telephone, or in person at stores, banks, and other places.) Different credit cardswill offer you different benefits and have different requirements for application, so it isimportant to get the credit card company's information in writing and take the time toreview it. Don't feel rushed to apply for a card over the phone or if someone is asking youin person. You should always ask to see the offer in writing and take your time to reviewit and decide. No offer is "too good to pass up" -- credit card companies offer special promotions all the time.
Here are some important things you should considerwhen applying for a card:
1. Is this card accepted many places?
Most places accept at least one brand-name card like American Express, Visa, andMasterCard. Fewer accept cards like Discover or Diner's Card (although these can still beused at most large stores and restaurants.) Most store credit cards, like Sears, JC Penny's,or The Limited are only accepted by the store that issues them.
2. Is there an annual fee?
Some credit cards charge an annual fee (usually as little as $20 a year), but other companies will waive (not charge you) the fee because they want your business.

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