There are lots of different credit cards, with lots of different features and benefits. How do you start to compare them? Credit cards usually are either targeted at specific kinds of people (like students) or those seeking a specific benefit (like airline miles or cash back). If you understand the various credit card types, you’re on your way to finding a card that benefits you most.
Before we dive in, let’s clear up one thing – are credit cards and charge cards the same thing?
People tend to use the phrases interchangeably, but there is a subtle difference. Credit cards offer a revolving credit line, so you can carry a balance from one month to the next. Interest charges can accrue and you are required to pay a minimum amount each month. Charge cards are a type of credit card which require you to pay the full amount you’ve spent each month. There are no finance charges because there is no balance that can be carried over from month-to-month.
Key Credit Card Types:
Balance Transfer – Consolidate your credit card debt and take advantage of zero or low balance transfer interest rates for an interim period. This is a great way to reduce your monthly payment and help you get control over your debt. Balance transfers often include a fee (typically around 3% of the balance transferred).
Business: There’s a lot on the plate for a small business owner, but these cards offer a little something to offset that hard work. Rewards may include cash back or travel benefits. Business cards also typically offer greater expense reporting to help track spending activity.
Cash back: When you use your credit card, merchants (stores) pay, on average, a 2% fee. Cash back cards pass some of that money back to you. Some cards offer a promotional period; other cards rotate the category or categories of purchases and the rebate each calendar quarter. If you’re after cash back, make sure you understand the card that best fits your individual needs and spending habits.
Low Interest: These cards offer either a 0% introductory APR (annual percentage rate) to get your business or a low on-going APR. If you’re in search of the 0% introductory rate, make sure you know long that introductory period will last and the interest rate for purchases made after that period ends.
Rewards: Rewards comes in many different flavors. It may be points that can be converted into gift certificates or merchandise from retailers or free hotel stays or airline travel (and upgrades). Don’t forget to include the annual fee for the card, if there is one, into your reward calculations.
Student: You’re just getting your financial life underway. Using a credit card wisely is a great way to start building your credit for important financial decisions down the line. These cards also provide you with some flexibility for on and off-campus spending.
Travel: Travel cards offer free flights and, in some cases, other airline benefits like waived baggage fees. Some cards are specific to one airline, while others allow you to redeem rewards through the card issuer – meaning more flexibility in airline choice. If you have a preferred airline, make sure to check out the details for their card.
0% APR: Credit card companies are competing to get your business and willing to make an attractive offer to get your attention. These cards offer a 0% introductory interest rate on new purchases. Pay attention to how long that introductory period lasts, so you can make good credit decisions.
Secured: Secured cards require collateral (prepayment). If you’re new to credit cards or looking to rebuild your credit record, these can be a great choice. Recently, we’ve found some people use secured cards to help keep a cap on their spending.
Prepaid cards: What a great name – it literally means what it says! While not technically a credit card, a prepaid card allows you load a card with a payment in advance – then you spend the balance down (and reload). Prepaid cards don’t have interest charges. One limitation with prepaid cards is that your activity isn’t reported to the credit bureaus. That means they don’t help you build your credit history.
Is one credit card type better than another? As you’ve probably figured out, your situation will probably make certain credit card types a better fit for you. Can you use multiple cards to put together a perfect mix? You certainly can have multiple cards for different goals. Just factor in how much time you’ll spend working through your options and tracking your day-to-day spending before you commit to a more complicated spending approach.