What Is A Bank Credit Card?

Credit cards, whether issued by banks or other institutions, are another form of revolving credit. These cards entitle their holders to a predetermined maximum against which they may borrow, and the principal repaid is automatically restored to the credit line.

You can use a credit card to pay for goods and services from participating stores, restaurants, airlines and the like and can also borrow cash against it. Interest rates on bank-card purchases tend to be high, and the rates for cash advances even higher. Business institutions that accept credit cards pay a fee to the issuer — the bank, for example — to help defray the cost of credit card transactions, while on a cash advance the customer must bear the entire cost.

Thousands of banks around the country offer major credit cards and until recently, most of them were issued without charge. Many customers made use of their cards to purchase goods and services and then, by paying in full during the first billing period, avoided all interest charges. In effect, these people were taking out short-term, interest-free loans.

As this practice defeated the banks’ purpose in issuing credit cards — to encourage purchases on credit so that the bank could earn interest — many institutions began charging membership fees of $15, $20 or more a year for the use of their cards. Some banks have waived fees in order to attract new customers, and others offer cards free of charge to those who maintain accounts with the bank. Because the interest rates on credit card purchases may vary from one institution to another, it is a good idea to check with a number of banks before deciding to sign up for a credit card.

Tags: Credit+Card, Credit+Cards

Types of Bank Loans

Bank credit for consumers falls into two general categories, closed-ended and open-ended. A mortgage, for example, is considered a closed-ended loan because it is for a specific amount and must be paid off over a specified period. A bank credit card provides an open-ended loan: it gives the cardholder a specific amount of credit against which he or she may draw in making purchases.

Installment Loans

These are closed-ended credit agreements. The borrower receives a certain amount of money and agrees to repay it over a stated period, usually month by month, at a predetermined rate of interest that will neither rise nor fall during the period of the loan. Because the loan is amortized, the borrower has the full use of the funds only for the first month.

The interest charged on installment loans varies from bank to bank and with the purpose for which the loan is to be used, so consumers should shop around for the lowest rate. Higher rates are usually charged for personal loans that have no particular purpose specified and that are “unsecured” — i.e. have no collateral in the form of property, such as an automobile or a boat, that the bank can take over in case of default. In contrast, a loan that is specifically written for the purchase of an automobile, in which the car itself serves as the security or collateral, can usually be obtained at a point or two lower interest. The lowest rates of all are generally offered on government-subsidized loans, such as those taken out by students for their college or postgraduate education.

Lines of Credit

These are open-ended loans, often given names like “Credit-Line Checking.” Whatever they are called, the bank provides the customer with a stated amount of credit that may be called upon, in whole or in part, at any time. Most loans of this type are linked to the customer’s checking account. To use the credit the customer writes a check. If there are insufficient funds to cover the withdrawal, funds from the credit line are automatically transferred to the checking account. If you use a line of credit, you are billed each month for the credit you have used and are required to make payments monthly against the principal and accrued interest charges. As the principal is reduced by a given amount, that amount is restored to your credit line. The interest on this “revolving credit” is usually higher than the interest on installment loans, but you can often arrange with the bank to have a specific sum taken from your checking or savings account each month to pay off the obligation.

Passbook Loans

The least expensive form of credit available at banks is usually a passbook loan which uses the borrower’s savings at a bank as collateral. Most passbook loans are written as installment loans and specify a repayment schedule.

Tags: Credit, Loans

The most common fallacy : Cheap credit cards is an easy way to borrow money.

At the first glance, inexpensive credit cards seem to be an easy way of borrowing. But for some people they can be a far too easy way to get money and, in despite of common sence, a very costly one. It is quite a usual practice that credit card issuers apply interest rates three times as high as the bank’s current annual interest rates.

How do banks calculate interests on credit card accounts?

This point turns to be fairly confusing, particularly when you are trying to choose between competing offers from credit card issuers. One and the same credit card may deal with as many as three or four different interest rate quotations. First of all, your credit card account will be charged monthly on the outstanding balance. On average, the interest you have to pay every month fall between 0.75 and 1.5 per cent. It sums up to the annual interest rate spread of 9 to 18 per cent. Though you can find credit cards with both cheaper and more expensive interest charges most of them will vary within this narrow range.
Sometimes the issuers of cheap credit cards apply very low or zero introductory interest rates. Low rates are used as an enticement to attract new customers and are usually valid only for a short term. Not longer than for one year. Be very careful with such appealing proposals for the next reasons. As a rule the attractive introductory rates don’t cover the transfer of outstanding balances from other credit cards until you have paid them out. And once the introductory period is over the interest rate may grow dramatically.

What other hidden gimmicks may credit cards conceal?

Credit card issuers may charge various annual or monthly fees. Depending on the banking institution, these fees can range from nothing to more than $150 a year. Some credit cards issuers may offer you lower interest rates for higher fund turnover. In other words, the more money you spend on the card, whether you pay it off or not, the lower interest rate you will be charged. All these altering charges can be quite confusing. It brings certain difficulties determining the resulting annual percentage rate (APR) quotation, the legally required percentage rate specification which is designed to show you the factual cost of borrowing. So not always you know exactly how much you will pay for the conveniences of credit card utilization.