With the right credit card, you can build a good score, reduce interest charges on existing debt, earn rewards, and even get cash back.
But how do you choose the right card for your needs?
While you don’t need to be a credit expert, you need to know a thing or two to make an informed decision.
To help you out, we explain how the main types of credit cards work and who they’re most suitable for.
Read on to learn all you need.
Understanding Credit Card Debt
Regardless of the type of credit card you get, the basic principle is the same.
It’s a plastic card that lets you pay for goods and services using the issuer’s funds. Unlike other types of credit, it allows you to borrow money repeatedly up to a predetermined amount.
After that, you repay the money you’ve spent in monthly installments.
Typically, if you pay off the whole balance on time, you won’t accrue interest charges. If you start missing payments or deposit only the minimum amount, your credit score will drop.
Of course, that’s an oversimplification. There’s much more to the way credit cards work.
The minimum payment, limit, APR, fees, and benefits you receive vary between different types of credit cards.
Let’s go over the main ones.
Types of Credit Cards
The main parts of every credit card are the same.
All the same, there are some key distinctions.
Here’s what they are.
Rewards Credit Cards
With rewards cards, you get back part of the money you spent. It may come in the form of bonus points or travel miles, depending on the issuer. Usually, you can redeem the points for merchandise, gift cards, or statement credits.
It’s a great way to save on purchases you need to make anyway.
That said, you have to pay off your balance in full every month. Otherwise, the interest charges will trump the rewards.
Cash Back Credit Cards
These two credit card types are very similar. The difference is that with cash back, you get back a fixed dollar amount instead of points or miles.
You can choose between a flat rate and a bonus category cash back card. The former returns a fixed percentage of all purchases, and the latter—a higher percentage but only for certain categories.
Credit One Bank American Express, for example, offers 1% cash back on all purchases. The Blue Cash Everyday® Card from the same company provides 3% for US gas stations, supermarkets, and retail.
Indeed, there are plenty of options out there. Be sure to compare them and pick the best one for you.
Travel Credit Cards
These are, essentially, rewards cards that provide travel credits only.
Typically, you earn points by paying for non-travel-related goods and services.
Then, you can redeem them for flights, hotels, and even travel-related purchases.
Balance Transfer Credit Cards
These types of credit cards are excellent if you have lots of high-interest debt and struggle to repay it. They allow you to transfer your balance and get a break from interest charges.
Usually, they come with a 0% introductory APR that lasts anywhere between 12 and 21 months. This gives you some time to pay off what you owe without accumulating new debt in the meantime.
While it’s a great way to avoid paying interest, you must read the terms carefully before applying.
Most importantly, check the balance transfer fees and APR after the introductory period.
0% Introductory APR Credit Cards
The 0% introductory APR can apply to balance transfers, as well as purchases.
Some credit card types combine both.
We already explained how the former works. The principle is the same for purchases. You can use the card and make payments without interest charges during the introductory period.
That said, you need to pay them off before the promotional period ends. Otherwise, interest will start accruing, and the rates may be high.
Low-Interest Credit Cards
Credit cards with promotional periods, rewards, and other perks usually have higher interest rates. If you repay everything you owe on time, it is worth it.
But if you aren’t sure you’ll pay off the full balance every month, you should look for a low-interest offer. Anything below 18% is a good APR.
Naturally, to get such terms, you need an excellent credit score.
Business Credit Cards
There are different types of business credit cards—travel, cash back, rewards. You need a registered company to qualify for one, though.
It’s a great way to keep your business and personal spending separate.
Plus, you’ll save on company expenses.
Student Credit Cards
These credit cards are a great way to build a good credit score. They’re easy to qualify for and usually come with lower interest rates.
Unless you’re a reckless spender, there’s no downside to getting a student credit card.
If you use it responsibly, it’ll help you improve your financial health in the long term.
Secured Credit Cards
These are also great first-time credit cards. The idea is that you put some money down as collateral. The issuer can use it in case you don’t repay your debt.
Since they get that extra security, credit card companies offer good terms. Plus, this card is easy to qualify for, and it’s a great tool for building a good score.
Charge Credit Cards
These cards combine the best features of debit and credit cards.
They offer the benefit of having money at your disposal when you need it without accumulating debt.
You can use them to pay for goods and services, but you can’t carry a balance. You have to repay the full amount every month.
Co-Branded Credit Cards
These types of cards offer rewards for specific brands.
Airlines, retail stores, hotels, chain stores, and so on often partner with credit card companies. This allows them to give out points, discounts, advances on sales, etc.
Store or private label cards work the same way, but only for one specific brand.
In contrast, co-branded cards are valid for a network of affiliates.
How to Choose the Right Type of Credit Card
When choosing a credit card, you need to consider:
- How often you’ll use it
- Whether you’ll carry a balance
- What rewards do you want to receive
And remember to read the fine print.
Different credit cards have different terms. You must pay close attention to all fees and interest charges, especially if you plan to carry a balance.
But before that, think about why you want a credit card in the first place.
Define Your Goals
Are you trying to improve your credit score? You can start by getting a secured card. You should check out the travel card deals if you travel abroad often.
A balance transfer card can help you pay off old credit card debt without accruing more interest in the meantime.
After you determine what you need, you have to think about what you can afford.
Evaluate Your Debt Situation
Next, you need to do a reality check. You may want to get multiple cards for different occasions—traveling, shopping, emergencies, and so on.
But if you’re already paying off several types of credit, that’s probably not the best idea. So, calculate your monthly payments to make sure you can afford to add more to that.
You also need to monitor your credit utilization rate. To maintain a good score, you have to be using under 30% of your available recurring credit.
If you already have a maxed-out credit card, you could get another one and distribute the borrowed amount between the two.
With good discipline, you can lower your utilization ratio.
Check Your Credit Score
Your credit score is a key determining factor of the terms you can get.
For example, if you have a 670 credit score, your credit card choice will be decent. A FICO score of this size is considered good. You’ll qualify for most cards, albeit not with the best terms possible.
In contrast, if you’ve just started building your score, you might be better off with a secured card. That way, you can improve your credit gradually and get a much better deal in a few months.
Compare Credit Card Options
Once you know what type of card you need, you can start comparing offers. A Discover and an FNBO credit card, for example, may offer completely different terms.
Check with several providers to see what terms they’ll give you. Finally, apply for the option that best fits your needs.
Wrap Up
With the numerous options on the market, finding the right credit card for your needs may seem overwhelming.
To help you start your search, we outline the main types of credit cards in our comprehensive guide.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.
