What makes credits cards very similar to trade credit is that both act as a type of loan.
Trade credit
For a business organization, a Creditor is the company to whom money is owed such as the supplier.
Credit cards
In case of credit cards, a creditor is not the supplier, but a financial institution such as the bank. Most of the typical banks around the world offer electronic funds transfers through providers of debit cards and credit cards such as Visa, Mastercard, American Express, Discover or UnionPay.
The bank issues a cash advance to the credit card holder to be used to make purchases online, buy goods and services in physical stores, pay bills online or withdraw cash from ATMs.
How credit cards work?
When you use a credit card to make a financial transaction, your card details such as your name and the card number are immediately sent to the merchant’s bank that issued you the card.
Then, the bank gets authorization from the credit card network to process the transaction for you. The bank extends you a line of credit, so you are using the bank’s money instead of your own.
As the credit card owner, you are obliged to pay the money back by the monthly payment due date (usually within 60 days).
What if I pay my credit card debt?
If you pay off your credit card account in full and on time every month, you will not incur any interest charges. So, you are literally using the bank’s money for free.
What if I do not pay my credit card debt?
If you do not pay off your credit card account in full and on time, you will be charged interest at approximately 15%-25% annually. Credit card interest is calculated as an Annual Percentage Rate (APR). The credit card balance will be multiplied each day by a daily interest rate and added to what you owe to the credit card company.
Note 1: The average Annual Percentage Rate (APR) for U.S. credit cards is around 20%.
Therefore, credit cards can be used as one of the short-term sources of external finance, especially for smaller unincorporated businesses such as sole traders and partnerships.
