Credit Card Definition

Payments Learning Resources

Credit Card Definition

For a credit card definition, practical answers to questions like how does a credit card work and a thorough explanation regarding the benefits of credit cards look no further than this article!

Credit Card Definition  - What are they?

graphic of two stacked mastercard credit cards

Put simply a credit card is an electronic card, usually made from plastic, which allows a person to borrow money in order to complete a sales purchase. The cardholder is issued a credit card by a banking institution, which in turn allows the cardholder to make purchases against a credit limit using their credit card. This eliminates the need for cash at the point of sale. Purchases accumulated on the credit card are then paid for by the cardholder at pre-agreed time intervals as well as additional charges for ‘borrowing’ this money to make purchases.

A brief history

credit card image front and back

The history of credit cards goes beyond modern day economics and the format in which we know this payment medium today. This ‘buy now, pay later ‘concept finds its roots in ancient times and has evolved through the ages to adapt to changes in global economic infrastructures and technology, as well as changes in people’s financial needs and purchasing habits.

The practice of using credit

As far back as 4500 BC, in the Sumer society, located in Mesopotamia (modern-day Southern Iraq), people relied on buying with credit and then settling debts upon harvest. Whether denominated in barley or silver, loans were given out to finance current needs and to be repaid at an agreed upon interest rate.

The early 1800s

During the 1800s, many stores and hotels opened up credit payments where people could have the amount owing attributed to their names where they would settle this debt seasonally or at a later date. These were mostly paper credit cards and could only be used with the merchant who issued them.

Diners Club

The introduction of the first card for payment is known as the Diners Club Card and this was the idea of Frank McNamara, who after forgetting his wallet one night when dining out, was determined never to be without a payment option. Inspired by this idea, he created a cardboard card which became an accepted form of payment in restaurants and hotels throughout New York City. It was a card that had to be paid in full at the end of the month, commonly known as a charge card.

Revolving Credit

Soon thereafter, a department store in Northeastern USA introduced the concept of revolving credit. Revolving credit operates much like a revolving door, whereby consumers are able to use credit for purchases up to a pre-approved credit limit. They then make repayments, along with the agreed-upon fees, on a regular basis and not on the basis of a fixed number of payments. As long as the credit limit is not surpassed, and the consumer makes their minimum payment requirements, credit is renewed on an ongoing basis, and can be used and reused. Additionally, the balance can be carried over month to month. This crucial technological advance also led to the creation of the 25 day grace period.

American Express’ plastic card

The plastic version of credit cards was introduced by American Express toward the end of the 1950s. By 1959 American Express was issuing plastic cards (with the cardholder details embossed) across the USA and Canada. The flexibility of credit and the convenience of a plastic credit card gained popularity quite quickly. Shortly after,  other card issuers like major banking institutions followed the American Express lead.  

The magnetic stripe

Once credit cards became popular as a concept, then technological innovation transformed the appearance and capabilities of this cashless payment instrument. A very important step in the history of credit cards was the addition of the magnetic stripe to plastic cards. The magnetic stripe had the ability to make electronic transactions quick and easy by storing data through magnetic recording. Magnetic storage was used long before credit cards, but IBM introduced the magnetic striped plastic card during the 1960s.  

EMV Chip Cards

Fast forward a few years into the third millennium and technologies like EMV were created to substantially change the credit card definition once again.  EMV chip technology got its name from its original inventors Europay, MasterCard and Visa. In short, EMV technology involves the use of microprocessor chips to store and protect credit card data.  Now widely used not only in credit cards and debit cards, but other devices such as mobile phones as well, EMV chip technology is used across the world in place of the magnetic stripe, to help reduce card fraud, enable safer transactions and ensure global interoperability.

How does a credit card work?

cartoon showing a waller, credit report and calender

Now that you are familiar with a credit card definition, below we attempt to have the process of using a credit card explained.

A person wishing to use credit cards as a payment medium begins by completing the process of an application and approval of a credit card.  During the application process, the issuer asks the potential cardholder for information regarding their citizenship, residency, employment, and income. The issuer will likely explain important aspects of using the credit card. For example, the issuer will have how does a credit card work, what is a credit card balance and the credit card APR explained. Based on their credit scoring methods and processes, the issue will also be able to answer questions such as how long does it take to get approved for a credit card?

Once the issuer reviews your profile and approves you, they will provide you with a credit card of a certain limit that will determine how much you can spend on credit for online and/or offline purchases.

Each month, the issuing bank then provides an invoice outlining all purchases made within the billing cycle. This is usually a period of 27-31 days depending on the issuer of the card. By reviewing this invoice you will be updated on purchases you made within your billing cycle and what is your credit card balance. You will be required to make a minimum payment for each billing cycle.

Cardholders are given two options for repayment. As a cardholder, you can either:

a) pay your balance in full, or

b) carry a balance by paying the minimum amount by the credit card payment due date. Depending on your credit card agreement terms and conditions, carrying a balance usually means incurring fees and charges for the revolving facility you use.

How do you determine the APR on a card

Every potential credit card holder should be aware that the convenience of using revolving credit comes with a price, in the form of annual percentage rates (APR) and monthly charges. Issuers have a duty toward the consumer to thoroughly have the credit card APR explained before issuing a credit card to its user.

How does credit card interest work?

a cartoon of a shopping cart display 0% interest

The APR is the interest rate paid on credit card balances that are not repaid within the grace period that credit card issuers specify. This is stated as a yearly rate. The final APR assigned to your credit card contract can be influenced by a number of factors, such as your creditworthiness, credit history and the prime rates of the central bank. APRs vary widely between credit card issuers, and they can range from anywhere between 10 and 25%. APR’s can also be subject to change in the future, as lenders (or issuers) can also raise the APR if a borrower’s credit gets worse, or if the national interest rate increases.

Credit card definition terms explained and questions answered

cartoon of the front and back of a credit card

There is a lot that needs to be answered, explained and defined when it comes to credit card definition terminology. This section will address some of the most common queries.


Secured Credit Card Definition - A secured credit card is one that is usually issued to people with little or no credit history. The issuers of secured credit cards will usually ask for a deposit as collateral on the account, and the credit limit is usually set at the same amount as the deposit.

Unsecured Credit Card Definition - Conversely, an unsecured credit card is the most common type of credit card, and it is not secured by any type of collateral.

Balance Transfer Credit Card Definition – in some cases, cardholders looking for lower APR alternatives to their existing credit agreements, will take their outstanding balances on their existing credit cards and move them to another credit card provider with a lower APR. Lower balance transfer APRs are a marketing tool that many credit card issuers use to attract new customers.

Credit Card Fraud Definition – credit card fraud occurs when there are unauthorized transactions taking place on an account without a credit card holder’s permission.  When a credit card or credit card details are lost or stolen and used without the consent of the cardholder, the transactions are then deemed fraudulent.

Grace Period definition – the grace period is the time interval you are allowed until you make your credit card payment, without incurring interest and fees.


How long does it take to get a credit card?

The process in obtaining a credit card can vary depending on a number of factors which include the type of credit card you are applying for, whether you are going through an online application process or via the mail, the type of credit score required for the type of credit card and so on. Simply put, each issuer has different processes and timelines in approving an application for a credit card.

What is a credit card balance?

The balance of a credit card refers to the amount you owe on your credit card account at the end of your billing period. If you make a payment towards a credit card balance, the balance is reduced. Any remaining amount gets carried over to the next month’s billing period and determines how much you have left to spend against your credit limit.

What is CVV on a credit card?

This refers to the three-digit number on the back of your Visa or MasterCard credit card or the four digits appearing at the front of your American Express above your credit card number. CVV stands for Card Verification Value. A CVV is a feature used in transaction processing to protect the cardholder against fraud and helps with verifying that you are in control of your actual credit card when an online or over the phone purchase is being made.

What is the relationship between a credit card acquirer and credit cards?

A credit card acquirer is a principal member of Visa and Mastercard who utilizes a secure payment gateway to process credit card payments received by merchants from credit card holders. Powercash21 is a credit card acquirer and a principal member of both Visa and Mastercard. Read more about our secure card acquiring services now.

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