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A staple of modern transactions both online and in-person, credit cards are a versatile payment method which gives cardholders the opportunity to afford more due to flexible payment plan options. Still, many people ask themselves: What is a credit card?
In this wiki entry, our readers will learn all about credit cards: what they are, how they came into circulation, and what the different types of credit cards offer cardholders.
Credit cards in a nutshell
- A credit card offers the cardholder the option to pay back a line of credit in a series of instalments, with interest
- The term ‘credit card’ was coined by a science fiction author in 1887
- Early credit cards functioned more like charge cards strictly for use with issuing merchants
- In the 1950s and 60s, companies like Mastercard and Visa began to issue credit cards that resemble the ones used today
- Credit cards are often made from plastic, although some are made from metal, titanium, or gold
- Different credit card types offer the cardholder various repayment methods
- Charge credit cards are common in Germany and offer cardholders an amount which must be paid in full at the end of the month
- Revolving credit cards most resemble the standard credit card, functioning on a revolving credit system
- Prepaid credit cards are ideal for cardholders without credit histories and must be paid using the checking account
What is a credit card?
A type of payment card, credit cards give cardholders the option to pay for goods and services based on a credit system, rather than with outright purchases. Once a customer is issued a credit card by either a financial institution or card issuer such as Mastercard or Visa, they will be given a line of credit. This amount of credit offered depends on a few factors:
- Creditworthiness of customer
- Type of card offered
- Issuer repayment plans
Generally, higher earning customers will be offered more generous payment plans with higher credit and longer time periods in which to pay it off. This is because there is more trust being extended to the customer due to their stable financial record.
Credit card history
The term ‘credit card’ was coined by science fiction author Edward Bellamy. In his 1887 novel Looking Backward, Bellamy envisioned a utopian Boston in the year 2000. Citizens are issued ‘credit cards’ with spending limits granted by the government.
In 1914, Western Union issued the first credit card under the name ‘Metal Money’, a precursor to eventual credit cards. Another proto-credit card was the Charga-Plate, developed in 1928, which were issued to customers by merchants, making it so they could establish a line of credit with that particular store.
It wasn’t until 1958 that the Bank of America launched the Bank of Americard and the company merged its licensees to become Visa. An early iteration of MasterCard released the Master Charge in 1966 and credit cards began to take on the form we know them to have today.
What changed in the 60s and 70s was that card companies had up until then failed to establish a revolving credit system. This enables the cardholder to borrow money repeatedly up to a certain limit while repaying a portion of the balance at regular intervals.
Credit card materials: What is a credit card made of?
While most charge cards are made from plastic, certain card types with higher lending allowances are made from different materials. American Express’s Platinum Cards and the Citi Prestige Card are made from metal, while other types are made from titanium, palladium, or even gold.
Card manufacturers are beginning to turn to more sustainable materials to produce their cards. Penta’s cards are made from 100% recycled PET-G plastic, making it the sustainable card option.
Credit card types
In Germany, there are three types of credit cards to choose from. There are certain differences to the types which will suit the consumer’s individual financial situation.
Charge credit card
This is the most common credit card type in Germany. Charge cards collect users’ payments over a period of 30 days, and then display them in a statement at the end of the month. The total amount on this statement is deducted from the user’s linked bank account, going into overdraft if there is not enough in the account to cover the expense.
Because the payment must be made in full by the cardholder, charge credit card bills will not include interest on payments made or a minimum payment system.
Revolving credit card
Functioning under the revolving credit system, revolving credit cards most resemble the definition outlined above in this article. Cardholders are given a spending allowance at the beginning of the month which will depend on the type of credit card they are issued and the conditions laid out in the contract. This amount can then be paid in full at the end of the month, with no interest rates attached, or paid in regular instalments, which must be paid with interest.
The instalment method and amount of interest will depend on the credit history and financial reputation of the cardholder.
Prepaid credit card
A preferred method for cardholders with strict spending limits or tight budgets, prepaid credit cards can also be issued without a SCHUFA, which is often the case for expats. To use a prepaid credit card, cardholders must first transfer funds from their checking account.