Understanding The Different Types Of Credit Cards

Posted on October 6, 2017

There are several types of credit cards; it can be difficult to know which one would work best for you if you don’t understand the details involved with each one. Aside from the fact that there are credit cards designed to fit nearly every income level and credit history, there can also be several levels involved within a single card company’s offerings.

These levels might include differing interest rates, varying fees, and specific types of rewards. Depending on your needs, you can almost certainly find a credit card that will suit you; it just takes a bit of research and some background information so you can make the right choice.

The “Everyday” Credit Card

This type of credit card is offered by most financial institutions and is the most common type of card available to consumers. These cards are generally unsecured, meaning you don’t have to put a deposit on hold with the card issuer to have a line of credit.

The interest rates on these cards can vary widely and may be calculated according to what type of transaction you’re making (balance transfers, cash advances, point-of-sale purchases, etc.) or a time period (some cards offer very low introductory interest rates).

The terms of these different offers should be thoroughly understood before you agree to them. Make sure you read the fine print in any paperwork before you make your first purchase, transfer a balance, or take a cash advance.

Cards that are intended to make balance transfers more attractive generally have a low-interest rate for several months to over a year for any balances that are transferred to them. This can be an excellent way to pay down cards that have high interest rates, but make sure you know whether there are penalties for unpaid balance transfer amounts after a certain time. Hidden penalties and fees can wipe out any savings you may have garnered from transferring the balance.

Some low-interest rate cards may have low introductory rates for a certain period, followed by higher rates. Other low-interest cards may offer an overall lower interest rate, without any changes from the introductory period.

This type of card usually doesn’t have a “0% interest” period as some other cards might, so it’s up to you to determine whether you need a card with no interest for a certain period, or one with a lower overall rate that is paid from the start.

Beware of accumulated interest that may get tacked onto purchases that aren’t paid off during the introductory period; read the terms and conditions before you start making purchases.

The Rewards Card

Some credit cards offer rewards programs to help attract new customers and retain current clients. These programs can offer a variety of benefits like air travel mileage, discounts on goods and services, and even cash back for the purchases you make on your card.

This type of card generally relies on points being awarded for each dollar charged to the card, and your account typically has to be in good standing in order to collect your bonuses. Rewards cards are usually reserved for those who have a good credit history and higher-than-average credit score. Rewards cards come in several different types, including:

Cash back – Every time you make a purchase with a cash-back rewards card, you earn a small amount of the purchase price, generally about 1%. You won’t earn anything on the interest charges or fees, but the more you use the card, the more cash back you earn. Some cards even offered a tiered rewards structure; increased usage increases the percentage of cash back, according to pre-set limits.

Other cash back cards offer higher returns for specific categories like groceries, utilities, gas purchases, or for specific merchants. Many cash back cards carry an annual fee, so make sure you’re not paying more than you’re likely to get back in rewards. Keep your card paid off every month for the greatest gains; used prudently, cash back cards can reap significant rewards over the long term.

Rewards points – Some credit cards offer a rewards points program wherein you earn a certain number of points for every dollar you spend on the card. These points can then be cashed in for the rewards offered by the card company.

These might include tickets to sporting events or concerts, stays in hotels, air travel, jewelry, self-care or pet-care supplies, and even the latest electronic gadgets. Rewards programs can change quickly; it’s important to keep abreast of the latest terms and conditions so you don’t miss out on your preferred redemption option.

Be aware of annual fees, as some rewards points cards have them, and some don’t. This is another type of card that should be kept paid off on a monthly basis to ensure you get the most from your points.

Travel rewards – Credit cards that offer travel-specific rewards can be a real boon for those who travel frequently. Some card companies partner with specific hotels or travel-related businesses to offer better incentives for their clients, but they almost always allow you to earn points on purchases (regardless of the purchase type) in addition to the higher incentives offered at co-branded hotels.

Your rewards might include free nights at a hotel, upgrades on travel accommodations, admissions for theme parks or other attractions, or a host of travel-related bonuses. This type of card usually has an annual fee attached, so make sure you’re not paying more for the card than you’re getting out of it.

Gas rewards – Many major gas station brands have co-branded credit cards that allow you to earn points for all purchases but offer an extra incentive for using the card at branded gas stations. You may also find a credit card that offers incentives for making purchases at any gas station, but these are typically somewhat smaller than those offered by brand-specific cards.

Retail points – Some retailers offer cards that are co-branded through major credit card companies. These generally offer greater incentives for making purchases at the co-branded retailer, while also offering points for other purchases, as well.

Branded store-specific cards may offer double, or even triple, incentives for purchases made at that retailer. These points often must be redeemed with the specific retailer, but if you shop there often anyway, this isn’t a real hardship.

Frequent flier rewards – Depending on the type of frequent flier rewards card you get, you may be able to redeem points for travel on a certain airline or on the airline of your choice. The points may also be available for redemption for hotel stays and other travel-related rewards.

Each of these cards has its own terms and conditions, so make sure you know what you’re getting before trying to redeem points. Read the fine print; you may have to accrue a certain amount of points before anything can be redeemed, or you may only get points for certain purchases. With others, your points may expire after a certain period of time, or you may need to pay a fee for using your accumulated miles or points.

Rewards programs can introduce a whole new level of confusion to your search for the perfect credit card. It’s up to you to determine whether the rewards are worth the costs, whether in higher annual fees or higher interest rates. Be wary of rewards programs with too many restrictions, as this can make it nearly impossible to redeem the rewards you earn.

Cards for Bad Credit

It’s not hard to end up in the “bad credit” category. A few months of being unemployed is often enough to send your credit from “pretty much okay” to “completely wrecked,” especially if you’re not prepared with enough emergency cash to keep on top of your monthly expenses.

While it only takes a missed payment or two to wreck your credit score, it can take years to rebuild it. During that time, it can feel nearly impossible to get lenders to even look at a credit application, let alone approve you for a credit card. Fortunately, there are some credit cards that are meant to help rebuild your credit and improve your overall score and payment history.

One way to ensure that you’re approved is to go for a secured credit card. This type of card requires that you have cash (or other collateral) on deposit with the lender in the amount of your credit limit. This helps the lender ensure that you’ll make regular payments on your account, or it can be closed and the deposit used to pay the outstanding balance.

Secured credit cards often carry application fees and annual fees and typically have lower limits (around $250) than unsecured lines of credit. Keeping up-to-date on a secured card lets the lender know that you’re trustworthy and can handle making regular monthly payments on your account.

After you’ve made the payments on time for a while, you can ask that your account be reviewed for an increased credit limit. Make sure the one you choose actually reports your account activity to the major credit bureaus so that your credit score can get a boost when you keep your account in good standing.

Prepaid credit cards are another good resource for those with poor credit, but they’re not actually credit cards. A prepaid card has a balance that’s equivalent to the deposits you make to the account, and you cannot go over the balance that’s available.

However, prepaid cards are often accepted and tendered just like regular credit cards, and it’s likely that no one who deals with you will know that you’re using a prepaid card. Prepaid cards don’t charge interest because no money is being lent, and the fees (if any are charged) are typically much lower than those for traditional cards.

These fees generally include a small amount charged to “load” the card with a deposit, and some cards also charge a fee if the balance isn’t refreshed regularly. You may also run into fees for using ATMs or monthly maintenance fees for having the account.

Credit Cards for Students

Young adults often have special circumstances that prevent them from getting a credit card. For college students, these may include a nonexistent credit history, income that’s difficult to verify, and a lack of monthly bills to prove the ability to handle a revolving charge account.

Fortunately, there are special credit options for students that take these circumstances into account. These credit cards are available to students who are enrolled in accredited universities and colleges and are designed to help students build and maintain their credit, even if they have no prior credit history.

While it’s true that student credit cards usually have reduced features and less access to rewards, they can still be a valuable asset if they’re used responsibly. Students who prove their ability to handle credit wisely will have an easier time getting approved for better cards and higher credit limits in the future.

Specialized Credit Card Options

Consumer credit cards are only one part of the credit landscape. Businesses and their employees often have a need for credit cards, especially for large purchases and frequent travel.

Business credit cards are designed to meet their specialized needs. Business credit cards also generally have a special set of perks and rewards that are more beneficial for businesses, including expense management tools, savings at business-related retailers, the ability to separate business and personal charges, extra cards with discrete limits for employee use, and better access to higher lines of credit.

Reading the Fine Print

No matter what kind of credit card you apply for, it’s important to read the fine print. Don’t get caught off-guard by high fees, accumulated interest fees, or other surprising charges. Shop around for the card that best fits your needs, and don’t be afraid to ask questions before you sign on the dotted line. There’s a credit card that’s right for every situation; the trick is to find it.

To learn more about your credit card options, contact Partners Financial FCU online or at 800-321-5617.

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