Borrowers seeking additional funding have access to several types of credit cards to consider. Depending on your personal financial situation, you may find some cards have different rewards, perks, interest rates, or credit limits you can take advantage of.
Here, you will learn about the basics of credit cards, how they work, and the different kinds available to borrowers.
The Basics: Credit Cards
While there are many different types of credit cards, most of them share a few core similarities. Below are some terms you should be familiar with if you are thinking about getting a credit card.
Account Credit Limit
A credit limit is a set amount of funding to which credit card account holders have access. For example, if you had a credit card with a credit limit of $500, you would be able to make purchases up to the amount of $500 during a single billing cycle. Credit cards are a revolving credit line, which means borrowers have access to a fresh credit limit at the end of each billing cycle.
Credit Card Billing Period
A billing cycle, or billing period, is a set amount of time during which borrowers may use the credit limit on their credit card. Usually, billing cycles are one month in length, beginning and ending on the same numerical day each month.
Credit Card Statement
At the end of each billing cycle, your credit card issuer will give you a credit card statement. Your statement will have a breakdown of each purchase made within the associated billing period. A credit card statement will also show the account holder’s total balance, as well as their accumulated balance for that particular billing period.
Credit Card Fees
Credit cards also often come with additional costs. Some common fees you may come across with credit cards are:
- Annual fee.
- Foreign transaction fees.
- Interest charges.
- Late fees.
- Intro balance transfer fee.
- Over-limit fees.
- Online cash advance fees.
Different Types of Credit Cards
Some common types of credit cards are:
- Standard credit cards.
- Unsecured and secured credit cards.
- Joint credit cards.
- Student credit cards.
- Store credit cards.
- Business credit cards.
- Rewards credit cards.
- Balance transfer credit cards.
- Subprime credit cards.
- Prepaid credit cards.
Depending on your financial situation, credit history, and other financial factors, you may find some of these credit cards more beneficial than others.
Learn about the different types of credit cards so you can decide which one is the best fit for you!
Traditional Credit Card
Consumers may access standard traditional credit cards, also known as unsecured credit cards, through most banks and financial institutions. Generally, terms, rates, and account limits are based on the consumer’s most recent credit report and credit history. A standard credit card may be extremely basic and not come with any extra perks like cash back or reward opportunities.
Secured Credit Card
Secured credit cards are a type of account where users prepay a security deposit, giving them the ability to then spend that funding via a credit card. Users spend the security deposit they put down on a secured credit card.
If you have suffered from bankruptcy or other financial hardships in the past, a secured credit card could be a helpful financial tool to help you get back on your feet and start establishing a positive credit history.
Joint Credit Card
A joint credit card is essentially one account with multiple cards, giving two or more authorized users access to the same credit account and credit limit. Married couples, roommates, or family members are the most common type of borrowers for joint credit cards.
Rewards Credit Card
Rewards credit cards are a type of account that comes with extra perks and benefits. For example, cash-back credit cards give a portion of a user’s credit purchases back to them at the end of each billing cycle. There are other types of rewards credit cards that can give borrowers points they can use for traveling, future purchases, or credit towards specific stores, restaurants, and businesses.
0% Intro APR Credit Card
There are also types of unsecured credit cards that don’t charge any interest for the first year, or for an initial introductory period. These cards are ideal for borrowers who are new to finances because it gives them some time to get used to using a credit card before they have to start dealing with interest charges.
Student Credit Card
Student credit cards are generally offered to college students who typically don’t have much of a credit history, making it difficult to find an approval for a traditional credit card elsewhere. Funding like student credit cards usually come with a low credit limit and high-interest rates, much like subprime cards.
Store Credit Card
Store credit cards are a type of credit account borrowers can use at a specific store or business. Unless you shop at a specific store often, you are probably better off staying away from store credit cards. If you apply for a store card and are denied, you may end up with a slight dip in your credit score.
Business Credit Card
Business credit cards are accounts entrepreneurs may access to make purchases for their business. Users can utilize business credit cards for expenses like:
- Startup funding.
- Payroll.
- Brick-and-mortar expenses like rent, utilities, etc.
- Business supplies.
Balance Transfer Credit Card
Balance transfer cards are used to combine credit card balances, making debt easier to manage. If you are dealing with debt from several credit cards, balance transfers may be able to help you out! Some balance transfer credit cards may come with a balance transfer fee, which is usually a portion of the transfer amount.
A balance transfer can take anywhere from a few hours to a few days depending on the card issuer, transfer amount, and program details.
Subprime Credit Card
Subprime credit cards are accounts offered typically to individuals with either bad credit or no credit. These credit cards may come with smaller spending limits and higher interest rates, encouraging users to pay off their balance in full each month. Subprime credit cards are usually unsecured credit cards, meaning users do not prepay a security deposit at the beginning of their billing cycle.
Prepaid Credit Cards
People can purchase prepaid credit cards at most grocery or department stores. Many prepaid credit cards function like most gift cards, where users pay ahead of time and load a certain amount of money onto a card. From there, users can go and spend the funding on anything they like, similar to a traditional credit card.
Potential Benefits of Credit Cards
Below are some of the benefits you could enjoy by getting a credit card!
Instant Transactions
Don’t worry about being low on cash when you have a credit card. If you find yourself in a situation where you don’t have sufficient cash on hand to cover an expense, your credit card may be able to cover the purchase. Instead of waiting for a paycheck to come or asking a family member to float you some cash, you can take of expenses within your credit limit instantly with a credit card.
Build Credit History
Borrowers who use their credit cards wisely may see an increase in credit scores over time. As you use your card and pay off your balance with timely payments, you are establishing a positive credit history. Since making payments on time is the most influential factor that affects credit scores, there is a good chance borrowers who use their credit cards responsibly will see a boost in their credit scores after a few months of credit card usage.
Added Perks / Rewards
As discussed, rewards credit cards come with extra perks borrowers can enjoy. Some card issuers may offer more or better bonuses than others, so be sure to get all of the benefit details from potential issuers before you make a decision.
How To Pick the Right Types of Credit Cards
With all of the different types of credit cards available, how do you make sure you are choosing the right one? You can use the tips below as a guide for helping you find the right kind of credit card that works for you.
Review Your Credit Reports and Credit Score
Before applying for a credit card, take a look at your most recent credit report. If your score is on the higher side, you may have access to a wider variety of credit cards than someone with poor credit or no credit. People with a low credit score are most likely better off going with subprime financial products.
Set Financial Goals
Think about why you want to get a credit card. Are you looking to have a bit of extra cash while you are in between paychecks, or are you looking to pay for a specific expense? Depending on your needs, you can set financial goals to stick to, to help keep you on track. For example, if you want a credit card for extra cash when in between pay periods, you may want to set a goal of keeping your credit card balance below a certain amount. That way, you know you will have sufficient funds to cover your balance when you do receive your next paycheck.
Assess Your Overall Debt
Next, consider how much debt you already have. If you have a significant amount of debt, you may want to consider paying off a portion of your debt before applying for a credit card. Having a massive amount of debt may cause you to receive an unfavorable credit limit or interest rates.
Compare Reward Programs
Credit card companies often offer rewards in exchange for credit purchases. There may be some rewards that coincide with your everyday needs. For example, if you frequently travel, you may want to consider getting a credit card that comes with airline miles as a reward.
Compare Fees, Rates, and Other Costs
Lastly, make sure you can afford your credit card. Compare annual fees, costs, and other expenses that come with credit cards. Make sure you only sign up for credit cards where you can afford any extra fees or charges associated with the account.
The Bottom Line: Types of Credit Cards
While there are many different types of credit cards, not all of them may be a great fit for you. To make sure you are paired with the most advantageous kind of credit card, assess your personal financial situation before you apply.
Once you have your credit card account, stay on top of your balance and keep it under control to avoid accumulating too much debt. If you need help controlling your credit card spending, you should seek financial advice right away. You can check out free financial resources on credit cards, debt consolidation, and more at the CreditNinja blog dojo!
References:
What Are the Different Types of Credit Cards? | Experian
Easy-to-remember guidelines help people reduce credit card debt | Consumer Financial Protection Bureau
What is the difference between a fixed APR and a variable APR? | Consumer Financial Protection Bureau
