Credit cards: those ubiquitous rectangles of plastic (or sometimes metal!) that grant us purchasing power and often come with a dizzying array of rewards and features. But with so many options available, understanding the different credit card types and choosing the right one can feel overwhelming. This guide will break down the various types of credit cards, their benefits, and how to select the best one for your individual needs and financial goals.
Understanding the Broad Categories of Credit Cards
Choosing the right credit card starts with understanding the basic categories. These classifications are often based on credit score requirements, target audience, or specific benefits.
Secured Credit Cards
- What they are: Secured credit cards are designed for individuals with limited or poor credit history. They require a cash deposit, which acts as collateral. The credit limit is usually equal to the deposit amount.
- How they work: You make a deposit, receive a credit card with a spending limit based on that deposit, and use the card as you would any other credit card. Responsible use can help build or rebuild your credit score.
- Example: The Discover it® Secured Credit Card is a popular option. If you deposit $200, you’ll typically get a $200 credit limit.
- Benefits:
Helps build or rebuild credit history.
Easier to get approved for than unsecured cards if you have bad credit or no credit.
Can be a stepping stone to getting an unsecured card.
- Actionable takeaway: If you have limited or bad credit, a secured credit card is a great starting point.
Unsecured Credit Cards
- What they are: Unsecured credit cards don’t require a security deposit. Approval is based on your creditworthiness, including your credit score, income, and credit history.
- How they work: You apply, get approved (or denied), and, if approved, receive a credit limit. You then use the card and make payments according to the card’s terms.
- Example: The Chase Freedom Unlimited® is a popular unsecured card known for its cashback rewards.
- Benefits:
No security deposit required.
Often offer rewards programs like cashback, points, or miles.
Provide more purchase protections and travel benefits than secured cards.
- Actionable takeaway: If you have a good to excellent credit score, explore unsecured cards with rewards that align with your spending habits.
Charge Cards
- What they are: Charge cards technically don’t have a spending limit, but require you to pay the balance in full each month. They are generally offered to individuals with excellent credit.
- How they work: You use the card, and at the end of the billing cycle, you’re expected to pay the entire balance. Failing to do so can result in significant penalties.
- Example: The American Express Platinum Card is a well-known charge card with premium benefits like travel credits and airport lounge access.
- Benefits:
No pre-set spending limit (though your spending power isn’t unlimited in practice).
Premium rewards and perks.
Encourages responsible spending as you need to pay in full each month.
- Actionable takeaway: If you have excellent credit and can reliably pay your balance in full each month, consider a charge card for its high-end rewards and benefits.
Understanding Reward Credit Cards
Many credit cards offer rewards, but the specific types and benefits vary significantly. Here’s a breakdown:
Cashback Credit Cards
- What they are: Cashback credit cards give you a percentage of your spending back as cash.
- How they work: You earn a certain percentage back on your purchases, either as a flat rate (e.g., 1.5% on all purchases) or in tiered categories (e.g., 5% on gas, 3% on dining, 1% on everything else).
- Example: The Citi® Double Cash Card offers 2% cash back on all purchases (1% when you buy, 1% when you pay).
- Benefits:
Simple and easy to understand.
Offers tangible monetary rewards.
Can be used for everyday expenses.
- Actionable takeaway: If you prefer straightforward rewards, a cashback card is an excellent choice. Look for cards with high flat-rate rewards or lucrative bonus categories relevant to your spending.
Travel Credit Cards
- What they are: Travel credit cards offer rewards in the form of points or miles that can be redeemed for travel-related expenses like flights, hotels, and car rentals.
- How they work: You earn points or miles for every dollar spent, often with bonus points for travel purchases. These points/miles can then be redeemed for travel directly through the card issuer or transferred to airline or hotel partners.
- Example: The Chase Sapphire Preferred® Card is a popular travel card with transferable points and travel insurance benefits.
- Benefits:
Can significantly reduce travel costs.
Often come with travel insurance, baggage protection, and other travel-related perks.
Offers flexibility to redeem rewards for various travel options.
- Actionable takeaway: If you travel frequently, a travel credit card can offer substantial savings and valuable travel benefits.
Points Credit Cards
- What they are: Points credit cards offer rewards in the form of points that can be redeemed for various options, including merchandise, gift cards, or statement credits, in addition to travel.
- How they work: You earn points on purchases, and the value of each point can vary depending on how you redeem them.
- Example: Many store-branded credit cards fall into this category, such as a department store card offering points towards discounts on merchandise.
- Benefits:
Offers flexibility in redemption options.
Can be a good option if you don’t travel frequently.
Often come with discounts or perks at the associated store.
- Actionable takeaway: If you prefer a variety of redemption options, a points card can be a good choice, especially if it’s tied to a store where you frequently shop. However, carefully evaluate the point values for different redemption options.
Credit Cards Based on User Profile
Different cards cater to different needs and lifestyles.
Student Credit Cards
- What they are: Designed for college students with limited or no credit history.
- How they work: They often have lower credit limits and simpler rewards programs. The focus is on helping students build credit responsibly.
- Example: The Discover it® Student Cash Back is a popular option, offering cash back rewards and good grades bonuses.
- Benefits:
Easier approval for students with limited credit.
Helps build credit while in school.
Often offer introductory rewards or bonuses.
- Actionable takeaway: If you’re a student, start building credit with a student credit card and use it responsibly by paying your bills on time.
Business Credit Cards
- What they are: Designed for business owners to manage their business expenses.
- How they work: They often come with higher credit limits and rewards tailored to business spending categories like office supplies, travel, and advertising.
- Example: The American Express® Business Gold Card offers rewards on the two categories where your business spends the most each month.
- Benefits:
Separates business expenses from personal expenses.
Helps track business spending.
Offers rewards on business-related purchases.
- Actionable takeaway: If you own a business, a business credit card can simplify expense management and offer valuable rewards on business spending.
Balance Transfer Credit Cards
- What they are: Designed to help you consolidate high-interest debt from other credit cards or loans.
- How they work: You transfer your existing balances to the new card, often taking advantage of a 0% introductory APR period on balance transfers.
- Example: Many cards offer a 0% APR for 12-18 months on balance transfers, though balance transfer fees usually apply.
- Benefits:
Can save you money on interest charges.
Simplifies debt management by consolidating multiple debts into one.
* Helps you pay down debt faster.
- Actionable takeaway: If you have high-interest credit card debt, consider a balance transfer card to save on interest charges and accelerate your debt repayment. Be mindful of the balance transfer fee and the APR after the introductory period ends.
Factors to Consider When Choosing a Credit Card
Choosing the right credit card depends on several factors.
Credit Score
Your credit score is a significant factor in determining which credit cards you’ll be approved for and the interest rates you’ll receive.
- Poor credit (300-579): Secured credit cards, some subprime unsecured cards.
- Fair credit (580-669): Some unsecured cards, store credit cards.
- Good credit (670-739): Many rewards cards, travel cards.
- Excellent credit (740-850): Premium rewards cards, travel cards with premium benefits.
Spending Habits
Analyze your spending habits to identify the categories where you spend the most money. Choose a card that offers the best rewards in those categories.
Interest Rates (APR)
Pay attention to the APR, especially if you carry a balance from month to month. A lower APR can save you significant money on interest charges.
Fees
Be aware of fees such as annual fees, late payment fees, balance transfer fees, and foreign transaction fees.
Rewards Programs
Evaluate the rewards programs carefully to ensure they align with your needs and preferences. Consider the value of the rewards, redemption options, and any limitations or restrictions.
Conclusion
Choosing the right credit card type requires careful consideration of your credit score, spending habits, and financial goals. By understanding the different types of credit cards available and evaluating the factors mentioned above, you can select a card that provides valuable rewards, helps you build credit, and simplifies your financial life. Always remember to use credit cards responsibly by paying your bills on time and avoiding excessive debt. Credit cards, when used strategically, are powerful financial tools.