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Types of credit cards: what are the differences?

types of credit cards

There are different types of credit cards, such as secured, business, student, etc. The differences between them include the eligibility requirements, loan amounts, interest rates, and rewards. Some cards are meant for specific uses, such as debt consolidation, retail discounts, or building credit. The best option for you depends on your specific financial needs and background.  

Multiple credit cards can be beneficial for consumers. In fact, Americans have an average of 3.84 credit cards.1 But if you’re new to lines of credit, it may be better to only start with one. 

In this article, 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, most cards 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 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 statement. Your statement will have a breakdown of each purchase made within the associated billing period. A line of credit 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 include: 

  • Annual fee
  • Foreign transaction fees
  • Interest charges
  • Late fees
  • Intro balance transfer fee
  • Over-limit fee
  • Cash advance fee

Different Types of Credit Cards

Some common types of cards are: 

Credit Card TypeInterest Rate (APR)Annual FeeRewards/Features
Traditional Credit Card13-23%$0-95N/A or basic rewards program
Secured Credit Card18-26%$0-49Helps borrowers build credit history
Rewards Credit Card16-25%$0-450Points, miles, or cash back on purchases
0% Intro APR Credit Card0% intro rate, then 14-24%$0-95Helps borrowers save on interest fees for a brief period
Student Credit Card14-23%$0Cash back on certain categories, good grade rewards
Store Credit Card20-29%$0Discounts and special offers at specific store
Business Credit Card13-20%$0-500+Rewards on business-related expenses
Balance Transfer Credit Card0% intro rate, then 15-24%$0-95Helps borrowers consolidate debt and potentially save on interest
Subprime Credit Card23-36%$75-99Helps low-credit borrowers get funding and build credit 

Depending on your financial situation, credit history, and other financial factors, you may find some of these credit cards more beneficial than others. 

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. Deposits typically range from $200 to $5,000.2 Card users spend the deposit from 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. If you make on time payments, secured credit cards could help you establish a positive credit history and improve your credit over time. A higher credit score can help you qualify for unsecured loans in the future.  

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 line 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 
  • 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.  

Wondering how long a balance transfer takes? 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 are an alternative to bad credit loans. They 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. 

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 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 off 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 usage. 

Added Perks / Rewards

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 card that works for you.  

Review Your Credit Reports and Credit Score

Before you find the best time to apply 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 FICO score are most likely better off going with subprime financial products. 

Set Financial Goals 

You can set financial goals to help you manage your spending and avoid falling into a debt spiral. Here’s a straightforward 8-step guide on how to set financial goals:

  1. Self-Reflection Time: Start by really understanding your financial situation. Look at your income, debts, expenses, savings, and investments. 
  2. Dream Big (or Small): What do you want your finances to help you achieve? A new home, a comfortable retirement, a college fund, or maybe a dream vacation? 
  3. Break It Down: Separate your goals into categories: short-term (less than a year), medium-term (1-5 years), and long-term (5 years or more). 
  4. Get Specific: Saying you want to save money isn’t enough. Define clear, specific goals like “save $10,000 for a down payment in 3 years.” This makes your goals more tangible and achievable.
  5. Plan Your Route: For each goal, plan the steps needed to achieve it. This might include setting a budget, deciding on the amount to save each month, or identifying investments.
  6. Safety Nets: Always plan for emergencies by setting aside a rainy-day fund. Life can throw curveballs, and it’s good to be prepared.
  7. Track Progress: Regularly review your goals and progress. This can help you stay on track, and it’s super motivating to see how far you’ve come!
  8. Adjust as Needed: Life changes and so can your goals. Don’t be afraid to adjust them as circumstances require. Flexibility can be key to success.

Assess Your Overall Debt

Next, consider how much outstanding 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 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. 

FAQs About Credit Cards

What’s the deal with charge cards?

Charge cards are like the ‘strict parents’ of credit cards. They allow you to make purchases, but you’ve got to pay off your balance in full each month. They’re great for borrowers who can commit to zero balance every month.

I’ve heard about secured credit cards. How do they keep things secure?

Well, secured credit cards are like a ‘safety net’ for both you and the bank. They require a security deposit that sets your credit limit. This way, the bank knows you’re good for the money.

Are rewards credit cards really rewarding?

With rewards credit cards, your everyday spending could earn you points, miles, or even cash back. Imagine buying your morning coffee and earning a bit towards your next vacation, all at the same time!

Do all credit cards come with an annual fee?

Many cards offer great benefits without the yearly charge, but some premium cards charge a fee for extra perks. It’s all about what fits your lifestyle and budget.

What’s special about store credit cards?

Store credit cards are like VIP passes to your favorite shop! They often offer exclusive deals, discounts, or rewards for that specific store. Just keep an eye on the APR; sometimes, they can be higher than other cards.

Can students get their own credit cards?

Student credit cards are designed for college-goers building their credit histories. They’re like training wheels for credit, helping students learn to manage credit responsibly while still enjoying student-friendly perks.

What’s the deal with cash back credit cards?

Cash back credit cards let your spending give back to you. A percentage of what you spend comes back to you as cash rewards or statement credits. It’s like finding change in your couch cushions, but all the time!

How do business credit cards help small businesses?

Business credit cards help separate expenses, give access to higher credit limits, and often come with rewards tailored for business needs, like travel or office supplies.

Are co-branded credit cards worth it?

Co-branded credit cards can be a loyal companion for dedicated shoppers or travelers. They’re the result of a team-up between a retailer or brand and a card issuer, often offering brand-specific perks. These cards are ideal for brand loyalists.

What’s the purpose of a security deposit on a secured credit card?

Think of the deposit as a safety blanket for the lender. It’s a sum you pay upfront that secures your credit line. If you miss payments, the bank has a cushion. But don’t worry, you’ll get it back if you decide to close the account in good standing!

How do I choose between all these types of credit cards?

In order to choose a card, you have to consider your options and what satisfies your current needs. Think about your spending habits, financial goals, and perks you’d like, whether that’s cash back, travel rewards, or a low interest rate.

What CreditNinja Wants You To Know About the Different Types of Credit Accounts 

While there are many different lines of credit, 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. 

At CreditNinja, we understand the importance of financial literacy. That’s why we provide free articles on personal finance in addition to online loans. You can learn the difference between pre-approved vs. pre-qualified credit cards, how to qualify for a credit card consolidation loan, and more! 

References:

  1. How Many Credit Cards Should You Have? | CNET
  2. How Much Should a Typical Deposit Be |  Ask Mr. Credit
  3. What Are the Different Types of Credit Cards? | Experian
  4. Reduce credit card debt | Consumer Financial Protection Bureau
  5. What is the difference between a fixed APR and a variable APR? | Consumer Financial Protection Bureau
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