Ever since the arrival of credit cards, people who use them have appreciated the convenience, allowing them to buy something today and pay for it later. And in today’s times credit cards have more perks than ever before.
Multiple types of credit cards have evolved in recent years. So it can sometimes be hard to determine which is the right type of credit card that suits your needs? Maybe you want a credit card to establish a credit history. Or maybe you are more interested in a credit card that earns rewards points you can use for cash or travel awards. Perhaps your credit card interest rate is too high and you want a balance transfer credit card with lower rates.
There are hundreds of different credit cards spread across many credit card issuers. So before you apply for a credit card, the first step is to figure out the type of credit card that is best for your needs and then do some research.
Types of Credit Cards
Here are some of the most common types of credit cards available today:
Standard credit cards
Most banks and financial organizations issue this type of card. It is easily and readily available and it is the most common credit card. A standard credit card is also called an unsecured credit card. This is because a person doesn’t need to pay a security deposit in order to prove that they can pay back what they owe.
A standard credit card offers no frills or rewards. A person who opts for this type of card doesn’t want any complications and is not interested in earning rewards or enjoy any kind of rebate.
This type of card usually allows the holder to have a certain credit limit. It allows a person to have a revolving balance, up to a certain credit limit. Credit is used up when they buy something and credit is made available once payment is made. At the end of each month, a finance charge is applied to outstanding balances. This type of credit card has a minimum payment that must be paid on a specified due date. If payment is not received, a late-payment penalty is applied.
Secured credit cards
Unlike standard or unsecured credit cards, secured credit cards require a security deposit that serves as collateral prior to approval. The security deposit is a predetermined amount, and it is usually greater or equal value to the amount of the deposit made on the card.
Secured credit cards are an option for people who are rebuilding their credit history or ideal for people who have no existing credit history yet. This is also a good way for people who have damaged credit scores to rebuild or improve their credit history. Not all credit card issuers report the payments to credit bureaus so it is important to choose one that does. Be sure to make monthly payments on time to build your credit rating.
These types of cards usually have low credit lines and higher interest rates. There may be other fees that are charged, such as application fees. If the card is used carefully and all the bills are paid on time, it is possible to apply for an increase in the credit line. In the case that a person decides to close or terminate their secured credit card but they still have an outstanding balance, the deposit made prior to approval will not be returned to them.
Subprime credit cards
Subprime credit cards are meant for people who have a bad credit history and can be used to start building a credit history as a last chance option.
Approval for subprime credit cards is usually quick, but it typically has high interests, extra fees, and lower credit limits. However, with a credit score below 600 this type of credit card will usually be your only option other than a secured credit card.
Cash Back credit cards
A cashback credit card allows cardholders to earn cash rewards when they make purchases. The total rewards are usually equal to 1% of the total purchase. These rewards can be redeemed for cash back, payment towards your balance credit, or gift cards. There are some cashback cards that have a flat percentage, while some offer bonuses. With this type of card, the more you use it, the more cash rewards you get. Cashback credit cards may also have other benefits such as shopping privileges and discounts, fuel surcharge waivers, and more.
Cashback programs are very popular with budget-savvy users, and if used the right way, a cardholder will be able to earn a good amount of money back over time.
Travel credit cards
This type of credit card is specifically aimed at frequent travelers who can afford to charge the amount required in order to qualify for rewards. Most of these cards are co-branded with major airlines or big hotel chains. A travel credit card allows the user to earn points for all purchases. A good travel card will have rewards that are equal to 1.5% to 2% of overall spending. With a travel credit card, people can earn travel perks such as free flights, travel miles, and free hotel stays or upgrades.
There are some travel credit cards that can earn the cardholder points which can also be redeemed for park admissions or specialized tours. There are even some cards that offer perks for travelers such as priority boarding, free checked bags, lost luggage insurance, and travel delay insurance. Most travel credit cards have annual fees. Before applying for a travel credit card, applicants must check if there is a cap on points that can be earned yearly or whether unused points have an expiration date.
Balance Transfer credit cards
Balance transfer credit cards allow the cardholder to transfer a high-interest credit card balance into a low-interest rate credit card. They usually offer a very low introductory rate (sometimes even 0%) on balance transfers for a given period of time. A 0% offer usually has a corresponding qualifier, such as a minimum of two transactions monthly. This kind of card gives an opportunity for the cardholder to pay off the balance of a high-interest rate card at low or no interest, for a limited duration.
Moving a credit card debt from one card to another requires a balance transfer fee, usually ranging from 3% to 5%. In order to qualify for a balance transfer credit card, a person needs to have good credit standing. Some institutions allow the transfer of the outstanding balance from multiple cards, which consolidates someone’s debt.
A balance transfer credit card is ideal for people who want to save money on interest payments. It is also good to plan to pay off balances during the introductory period when interest rates are still low. Before applying for a balance transfer credit card, applicants should make sure that they have thoroughly read the terms and conditions.
Prepaid card/bank card
A prepaid card, sometimes called a bank card, is technically not a credit card. However, it can be used and is accepted by most merchants just like a regular credit card. As the name suggests, the cardholder has to pay the financial institution or card issuer beforehand before using the card. The cardholder can also load money onto the card as frequently as they want. The credit line is determined by how much money is transferred to the card. Purchases are credited to the card’s balance. This means that the spending limit on the card is not renewed until more money is loaded onto it.
Using a prepaid credit card has several advantages. There are no finance charges and debt is avoided. This also makes budgeting easier for the cardholder. Most prepaid cards have no finance fees. However, other fees are charged such as application fees, ATM fees, over-limit fees, and reload fees. These cards are not tied to any other bank account. Using this does not directly help rebuild a person’s credit score.