Having a credit card can offer a lot of benefits, especially when you are trying to build or repair your credit score and history. If you are considering applying for a credit card, then it is important to learn more about the types of credit cards available as each type can offer different benefits.
Each credit card will include its own policies, including interest rates and fees that you may accrue over time. Therefore, it is also essential that you learn more about common fees, including annual fees and interest charges, including how to avoid these fees and what to look for when applying for a credit card.
What is a credit card?
A credit card is a convenient line of credit that can be used to pay for goods and services. When using a credit card, you do not need to have funds in your bank account to complete a purchase.
You pay back the amount of money that you “borrowed” in installments that typically occur on a monthly basis. Alternatively, you can pay your balance in full in order to avoid interest charges on your next billing cycle.
The Benefits of Having a Credit Card
There are several types of credit cards available. Each type will have different additional benefits and perks, such as discounts and rewards. Many benefits for having a credit card include:
- A greater ability to build and rebuild credit scores and histories.
- Protection on the purchase of defective goods.
- Rewards for purchases you already make, such as cash back.
- Discounts for other services and other perks.
Some credit card benefits, such as rewards, may vary based upon the type of credit card you have. For example, if you have a store credit card, you may be able to receive additional discounts for purchases made within that particular store using the credit card.
Types of Credit Cards Available
There are several types of credit cards available. By understanding the most common types of cards, you will likely gain a greater knowledge of the type of card that is most important to you and you can make an informed decision before submitting an application for a card.
Standard Credit Cards
Standard credit cards are cards that do not offer additional benefits that come with rewards, balance transfers or specialty cards. Like all credit cards, standard cards have a variety of credit-line limits, interest rates and fees.
These cards remain simple while still offering the ability to build or rebuild a credit score efficiently. If you are looking for a credit card without the bells and whistles that are included in other types of cards, consider acquiring a standard one with the lowest interest possible or a card that does not include common fees, such as an annual fee.
Rewards Credit Cards
Rewards credit cards are cards that reward you for their use. For example, cashback rewards cards provide you with a percentage “cash back” on qualifying purchases. For some cards, “qualifying purchases” may be limited to specific items, such as groceries or gasoline, while others may provide a reward amount for anything that you pay for with your credit card.
While cashback rewards can add up, their best uses are towards purchases that you already make. For example, if you receive five percent cash back on gasoline purchases, you would be receiving $5 for every $100 that you spend. While that is not an exuberant amount of money, it can add up.
Rewards can typically be applied to your credit card balance or transferred to a bank account. Alternatively, some rewards programs will offer alternative incentives, such as discounts on airline tickets and hotels by accruing travel points or miles.
Secured Credit Cards
While credit cards are an excellent option in building or rebuilding credit, they are not always obtainable. If you have poor credit or lack credit, you may be denied most credit card types. If you are approved, your credit card will likely include a higher interest rate.
Secured credit cards are an outstanding option when you otherwise do not qualify for a credit card. These cards require a deposit when opening an account. The deposit that you pay then becomes your line of credit, thus eliminating risk to the lender. While you’re technically paying for your initial line of credit, you can still utilize your card to improve your credit score in the same ways as other credit cards.
Balance Transfer Credit Cards
Balance transfer credit cards feature a promotional interest rate, generally of zero percent, for a set period. This time period may be between six and 24 months depending on the card.
These cards offer an exceptional debt management solution if you have several other types of debt with higher interest rates. Balances from other debts are transferred onto a balance transfer credit card and then paid off, ideally, before the end of the promotional period in order to save money on interest charges.
However, balance transfer credit cards typically feature high-interest rates after the promotional period. Therefore, these cards are generally only best to use to finance a large purchase (during the promotional period) or to utilize as a debt management solution.
Specialty Credit Cards
Specialty credit cards, such as student credit cards or store cards, offer very specific benefits and perks. For example, a student credit card typically reduces eligibility requirements for students and can, thus, be used as an alternative to a secured credit card when building a credit history for the first time.
Store cards work similarly to rewards cards, except that these cards will typically reward you by providing “cash back” options or discounts for in-store use. However, these cards are also commonly restricted to the retailer and cannot always be used elsewhere.
Understanding Credit Card Interest and Fees
Every type of credit card includes interest rates and fees. The interest rate is a percentage of money that you pay each month based upon your rate and the balance on your credit card. The higher your interest rate and balance, the higher the fee. These charges are essentially an amount you will pay to borrow a certain amount of money. However, monthly interest charges can be avoided by paying off the entire balance of the card within the card’s grace period before the new billing statement is issued.
In addition to interest rate charges, there are other fees that you may encounter when utilizing a credit card. One of the most common fees is an annual fee, which is charged one per year to keep the credit card open.
Depending on the type of credit card you obtain, you may also experience fees such as:
- Cash advance fees, which are fees that are accrued when collecting cash from a credit card.
- Foreign transaction fees, charges that occur when using a credit card outside of the United States.
- Balance transfer fees, a fee that is charged when moving an existing debt onto another credit card.
- Late payment fees, a penalty that you will incur when late on your payment.
- Returned payment fees, received when a payment bounces.
Whenever opening a new credit card account, it is very important to ask a representative about potential fees and interest rates before the submission of your application.
Is it bad to have several credit cards?
Having several credit cards can be incredibly beneficial to your credit score, so long as the balances on your credit cards are low and in good standing. Your credit score is based upon several financial factors, including the length of time that you have had an open line of credit, how many credit accounts you have and your credit utilization.
However, if you are considering applying for several credit cards, it is important to keep balances low or, ideally, not carry a balance from one month to another at all as each card will accrue an interest charge based upon the balance on the card. Therefore, you should always strive to pay off a credit card, when possible, before the next billing statement for that credit card is issued.