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What is Prepaid
Credit Cards?
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A
prepaid credit
card is a system of payment named after the small plastic card
issued to users of the system. A credit card is different from
a debit card in that it does not remove money from the user's
account after every transaction. In the case of credit cards,
the issuer lends money to the consumer. It is also different
from a charge card which requires the balance to be paid in
full each month. In contrast, a credit card allows the
consumer to 'revolve' their balance, at the cost of having
interest charged. A user is issued
credit after an account has been approved by the credit
provider with which the user will be able to make purchases
from merchants accepting that credit card up to a
pre-established credit limit.
When a purchase is made, the
credit card user agrees to pay
the card issuer. The cardholder indicates their consent to
pay, by signing a receipt with a record of the card details
and indicating the amount to be paid or by entering a PIN.
Also, many merchants now accept verbal authorizations via
telephone and electronic authorization using the Internet,
known as a Card not present (CNP) transaction. |
Each month, the credit card user
is sent a statement indicating the purchases undertaken with the
card, any outstanding fees, and the total amount owed. After
receiving the statement, the cardholder may dispute any charges
that he or she thinks are incorrect. Otherwise, the cardholder
must pay a defined minimum proportion of the bill by a due date,
or may choose to pay a higher amount up to the entire amount owed.
The credit provider charges interest on the amount owed and some
financial institutions can arrange for automatic payments to be
deducted from the user's accounts. Credit card issuers usually
waive interest charges if the balance is paid in full each month,
but typically will charge full interest on the entire outstanding
balance from the date of each purchase if the total balance is not
paid.
The credit card may simply serve as a form of revolving
credit, or it may become a complicated financial instrument with
multiple balance segments each at a different interest rate,
possibly with a single umbrella credit limit, or with separate
credit limits applicable to the various balance segments.
Usually this compartmentalization is the result of special
incentive offers from the issuing bank, either to encourage
balance transfers from cards of other issuers, or to encourage
more spending on the part of the customer. In the event that
several interest rates apply to various balance segments,
payment allocation is generally at the discretion of the issuing
bank, and payments will therefore usually be allocated towards
the lowest rate balances until paid in full before any money is
paid towards higher rate balances. Interest rates can vary
considerably from card to card, and the interest rate on a
particular card may jump dramatically if the card user is late
with a payment on that card or any other credit instrument, or
even if the issuing bank decides to raise its revenue. As the
rates and terms vary, services have been set up allowing users
to calculate savings available by switching cards, which can be
considerable if there is a large outstanding balance.
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