Legal Definitions - credit card

A credit card is a financial instrument, typically a plastic card or a digital account, that allows an individual to borrow money up to a pre-approved limit to purchase goods and services. When a credit card is used, the card issuer (usually a bank) pays the merchant on behalf of the cardholder, and the cardholder then owes that amount to the issuer. This system operates on a revolving credit basis, meaning the cardholder can continuously borrow, repay, and re-borrow funds as long as they stay within their credit limit and make at least the minimum required payment each billing cycle. If the full balance is not paid by the due date, interest is typically charged on the outstanding amount.

Here are some examples illustrating how a credit card works:

• Everyday Shopping: Imagine Sarah is at a department store buying new clothes. Instead of paying with cash or a debit card, she hands over her credit card. The store processes the transaction, and Sarah walks away with her purchases. The credit card company has effectively paid the store on Sarah's behalf, and now Sarah owes that amount to the credit card company. She will receive a statement later detailing her purchases and the amount due, which she can pay in full or over time, incurring interest if she carries a balance.

• Online Travel Booking:David plans a vacation and books his flight tickets and hotel accommodation online. He enters his credit card details on the travel website to complete the purchase. The airline and hotel receive payment from David's credit card issuer, and David now has a balance with his credit card company. This demonstrates using a credit card to obtain services (travel and lodging) on credit, allowing him to secure his trip now and pay for it later, potentially in installments.

• Unexpected Emergency:Maria's car suddenly breaks down, requiring an expensive repair that she hadn't budgeted for. She uses her credit card to pay the mechanic's bill. This allows her to get her car fixed immediately, even though she doesn't have enough cash readily available. She can then repay the credit card company over the next few months, making minimum payments and managing the interest, showcasing the flexibility of revolving credit for unforeseen expenses.