UK Accounting Glossary
Credit cards or ‘plastic’ are payment mechanisms used to pay for goods or services. Most credit cards are plastic cards with magnetic strips that can be ‘swiped’ to register account details. A receipt is then printed off that the customer signs. Credit cards are a convenient replacement for cash and cheque payments.
There are also virtual credit cards that do not have a physical card. Instead, they are an account number with an associated pin number that can be used for payments online and by phone, but not physically.
Credit cards are issued by a bank to its customers. The actual transactions are facilitated by credit card companies such as Visa, Mastercard, American Express or Diners.
When a customer makes a purchase, the merchant’s payments system will go back to its own bank (the acquiring bank). It will root a request through the credit card network to the issuing bank, which will check that the credit card account is valid. If so, it will then complete the transaction.
A credit card is the small plastic card issued to the borrower. the credit card issuer agrees to lend the buyer money (at a significant interest rate) for the purchase and promises to pay the seller. The credit card issuer typically provides a 25-day grace period during which credit card interest charges do not accrue. After the grace period has passed, the buyer can pay off the credit card charge in full and thereby incur no interest rate charges or pay off a fraction of what is owed plus interest until the entire credit card charge is repaid. The two most common brands of credit card in the US are VISA and MasterCard. Closely related to the credit card is a charge card. Functionally, charge card use and credit card use are the same, but the invoice sent each month on a charge card must be paid in full. Unlike a credit card, the debit card is closer to payment by check, with funds withdrawn from the buyer’s account as quickly as the transaction can be processed.
Credit cards, perhaps the symbol of consumer freedom, allow you to spend whenever you want regardless of what’s in your bank account. Credit cards are issued by all the major banks and many other companies, including newspapers, charities and clubs. They provide flexibility and convenience, especially when you are away from home.
Some credit card issuers will charge you an annual fee. This can range from £10 a year for a Scottish Widows Hi Value MasterCard to £275 for a Morgan Stanley i24 MasterCard. However, most credit cards don’t levy an annual fee – even Gold and Platinum cards – should you qualify.
The good things about credit cards are the convenience and flexibility they offer – and in most cases, you can enjoy a credit-free period, typically up to 56 days. But if you’re looking to borrow money, they are among the most expensive options available with annual percentage rates of interest (APRs) and bear little relation to the Bank of England base rate.
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This glossary post was last updated: 4th February 2020.