There are hundreds of credit cards spread across dozens of credit card issuers. The first step to choosing your first credit card is to figure out the type of credit card you want based on your needs.
There are Several Different Types of Credit Cards—Which One is Right for You?
With so many credit cards available, how do you pick the one that’s right for you? When you start to compare credit cards, the combinations of features, perks and conditions can be overwhelming.
Before you pick a specific card, it’s helpful to understand the different types of credit cards that are available. How do they match up to your credit score, your needs, and the kinds of rewards you want to earn? And what are the fees, interest rates and other charges associated with each type of card? This guide to credit card types can help you get started.
Before applying for a credit card it’s important to work out how you want to use it.
Do you need it to reduce debt? Are you planning on making a big purchase and want to spread the cost across a few months? Or are you going on holiday and need it to spend abroad?
We’ve set out some motivations behind getting a credit card and which deals might suit below but read on to find out how these cards can work for you.
- Earn rewards: a cashback or reward credit card
- Help with debt: a 0% money transfer or a 0% balance transfer credit card
- Everyday spending: a low-interest, cashback or reward credit card
- Improve your credit rating: a credit-builder card
- Spending abroad: a travel credit card or a prepaid card if you don’t want to borrow
- Making a big purchase: an interest-free or low-interest credit card
Standard “Plain-Vanilla” Credit Cards
Standard credit cards are referred to as “plain-vanilla” credit cards because they offer no frills or rewards. They’re also relatively easy to understand. You might choose this type of credit card if you want a card that isn’t complicated and you’re not interested in earning rewards.
The standard credit card allows you to have a revolving balance up to a certain credit limit. Credit is used up when you make a purchase and then more credit is made available once you’ve made a payment. A finance charge is applied to outstanding balances at the end of each month. Credit cards have a minimum payment that must be paid by a certain due date to avoid late-payment penalties.
Standard credit cards used to be one of the most common credit card types, but that’s no longer the case. Most credit cards offer at least some benefits that qualify them for another category.
Rewards or Cash Back Credit Cards
Depending on the card, cash back credit cards may reward everyday spending on things like groceries, gas, dining and entertainment. For every qualifying purchase, you earn back a percentage of what you spend.
There are three basic types of rewards cards: cashback, points, and travel. Some people prefer the flexibility of cashback rewards, while others like points that can be redeemed for cash or other merchandise. Travel rewards cards remain a favorite among frequent travelers because of the ability to earn free flights, hotel stays, and other travel perks.
Some of the ways you might be able to redeem your cash back include:
- Statement credits.
- Checks.
- Gift cards.
There are a couple of different types of cash back credit cards to choose from:
- Flat-rate cards offer the same reward rate for all purchases.
- Category-earn cards may offer higher rewards when you use them for particular things, like restaurant bills or groceries.
Looking for a credit card that can reward you for your everyday spending? You could receive cashback, air miles, rewards points or vouchers with a rewards credit card.
Advantages:
- Money back on your spending: When used wisely, rewards credit cards can be a way to get a bit of money back on your daily expenses
- Rewarded for loyalty: You could get extra rewards points for shopping in particular stores, so if you do a lot of your shopping at one retailer you could receive extra incentives
- Perks for travellers: If you do a lot of travelling, a rewards credit card could be beneficial to you as you can earn air miles on your spending
Disadvantages:
- Charges and fees: A lot of rewards cards charge a monthly or annual fee. You’ll also face fees if you use your rewards credit card abroad or at a cashpoint
- Meet your repayments: If you don’t pay off your balance each month, a rewards card might not work for you. You’ll pay high rates of interest and your credit score can go down if you carry a large balance on your card relative to your total credit limit
- Remember to budget: Rewards cards can encourage you to spend more as you’re getting rewarded for your purchases, so make sure you can afford what you’re buying and aim to clear the balance in full every month
Balance Transfer Credit Cards
While many credit cards come with the ability to transfer balances, a balance transfer credit card is one that offers a low introductory rate on balance transfers for a certain period of time. If you want to save money on a high-interest rate balance on an existing card, a balance transfer is a good way to go.
Balance transfer interest rates vary — some are as low as 0 percent, but these usually have qualifiers such as a fee for each transfer.
The lower the promotional rate (and longer the promotional period) the more attractive the card is. However, you’ll often need good credit to qualify.
A balance transfer card does exactly what the name says – you transfer your existing credit card balances (at a higher interest rate or APR) onto one low rate or 0% rate card. This can help you consolidate your existing debt to one pot. If you choose a 0% interest balance transfer card, you could avoid paying interest on your balance for up to two years. This can help you pay off your debt faster.
Advantages:
- Save on interest fees: Transferring your existing debt onto one 0% interest card means you could avoid paying interest for up to two years
- Clear your debts faster: If you have multiple credit accounts with different interest rates to cover, you could clear your debt faster by consolidating your debt into one pot at a lower rate with a balance transfer card
- Keep track of your debts: By transferring your existing credit card balances to one card, you’ll have a better idea of how much you owe, with only one balance to pay
Disadvantages:
- Potential fees: You may need to pay a fee to transfer a balance. There may be the option to take out a no fee balance transfer card, but there will be an eligibility criteria you’ll need to meet. A no fee card might be beneficial depending on your balance, but the card deal may not come with the longest 0% period
- Be wary of interest: Once you’ve passed the interest-free period (this could be a few months or up to two years), you may face much higher interest charges
- Don’t miss a payment: If you miss a payment on your balance transfer card, you’re likely to lose your 0% interest rate
Student Credit Cards
Student credit cards are those specifically designed for college students with the understanding that these young adults often have little or no credit history. A first-time credit card applicant would generally have an easier time getting approved for a student credit card than another type of credit card.
Student credit cards are “starter credit cards” of sorts specifically geared to young people with a limited credit history. In other words, application requirements aren’t as stringent, so it’s easier to get approved. Most student credit cards don’t charge an annual fee and many offer bonus perks for good grades as well as rewards for each dollar you spend. If used responsibly, signing up for a student credit card can help young people build their credit and start creating good financial habits.
Student credit cards may come with additional perks like rewards or a low interest rate on balance transfers, but these aren’t the most important features for students looking for their first credit card. Students generally have to be enrolled at an accredited four-year university to be approved for a student credit card.
Charge Cards
Charge cards do not have a preset spending limit and balances must be paid in full at the end of each month.
Charge cards typically do not have a finance charge or minimum payment because the balance needs to be paid in full. Late payments are subject to a fee, charge restrictions, or card cancellation depending on your card agreement.
You typically need to have a good credit history in order to qualify for a charge card.
Secured Credit Cards
Secured credit cards are an option for people who don’t have a credit history or who have damaged their credit status. Secured cards require a security deposit to be placed on the card. The credit limit on a secured credit card is typically equal to the amount of the deposit made on the card, but it could be more in some cases — such as a major default such as defaulting on a mortgage payment. It’s worth noting that you’re still expected to make monthly payments on your secured credit card balance.
These are almost always credit cards for people with bad credit. If you have a better credit score, you can likely qualify for credit card types that don’t require a deposit. But if you’re building or rebuilding credit, a secured card can be helpful. It’s much easier to get approved for a secured credit card since you’re paying a deposit upfront.
Subprime Credit Cards
Subprime credit cards are one of the worst credit card products. These credit cards are geared toward applicants who have a bad credit history and these cards typically have high interest rates and fees. While approval is often quick, even for those with bad credit, the terms are often confusing. The Federal government has made rules regarding the amount of fees subprime credit card issuers can charge, but the card issuers often look for loopholes and ways to skirt these rules.
Despite the unattractiveness of subprime credit cards, some consumers continue to apply for the cards because they cannot get credit elsewhere. This is a situation where you have to proceed at your own risk.
Prepaid Cards
Prepaid cards require the cardholder to load money onto the card before the card can be used. Purchases are withdrawn from the card’s balance. The spending limit does not renew until more money is loaded onto the card.
Prepaid cards do not have finance charges or minimum payments because the balance is withdrawn from the deposit you’ve made. These cards are not actually credit cards, and they don’t directly help you rebuild your credit score. Prepaid cards are similar to debit cards, but are not tied to a checking account. A lot of people use them as a way to stay within budget.
Business Credit Cards
Business credit cards are designed specifically for business use. They provide business owners with an easy method of keeping business and personal transactions separate. There are standard business credit and charge cards available.
Even for a business credit card, your personal credit history is considered because the credit card issuer still needs to hold an individual accountable for the credit card balance.
Business credit cards can help you keep your business and personal expenses separate. This may make things easier when it comes to doing your taxes. And they often offer higher credit limits than consumer credit cards do.
And how you earn rewards can vary. For example, some business credit cards offer a flat rewards rate for all purchases. Others might have higher rewards for business-related purchases like travel or office supplies.
Plus, there are often other perks that might come with a business credit card:
- Employee spending tracking and management
- Travel and emergency assistance
- Discounts with a selected list of merchants
- Additional cards for your employees to use
If your issuer reports your business credit card to the business bureaus, responsible use of it can help you build your business credit. And if your issuer also reports your business credit card to the consumer bureaus and you’re personally responsible for the account, that can also affect your personal credit score.
Store Credit Cards
Store credit cards work a lot like other types of credit cards. And, as the Consumer Financial Protection Bureau explains, “These cards typically provide additional discounts and frequent shopper rewards when used exclusively at their stores or with affiliate retailers.”
There are two types of store credit cards:
- Private label: These can usually be used only at the store or group of stores affiliated with the card.
- Co-branded general purpose: Like traditional credit cards, these can be used outside the store or group of stores affiliated with the card.
Store cards—like other credit cards—can be a great financial tool when used responsibly. And they can offer discounts, benefits and access to experiences that are exclusive to cardholders.
Credit Cards With Low or 0% APR Intro Rates
Some credit cards offer low or 0% introductory rates that apply to purchases. These can be useful if you’re planning to make a big one-off purchase and then pay it back quickly.
Others offer the rate to transfer a balance or to consolidate debt. And many offer the low rate for both.
If you’re carrying a balance, transferring it to a card with a lower or 0% introductory interest rate could actually help you pay less in interest—if you use the card responsibly and pay the balance during the introductory period. But keep in mind that a balance transfer could come with fees. And that could impact any potential savings.
By law, intro rates must last at least six months. During that time, you can focus on paying down your account balance. That’s because, depending on the promotional rate, you may not have to pay much—or any—interest for that period.
When the intro rate expires, the standard APR kicks in. And the standard APR won’t just apply to any future balances on the card. If you’re carrying a balance when the intro rate expires, the standard APR will apply to your current balance too.
And depending on your card’s terms and conditions, it could kick in early if you are late with payments or if you exceed your credit limit.
Advantages:
- Reduced interest: A low-interest credit card reduces the amount of interest you’ll pay over the lifetime of your credit card. They don’t typically charge annual fees
- Less of a need to switch: If you don’t want to keep switching from card to card, or don’t want to be switched to a higher APR when your 0% interest period ends, a low-rate card could suit you
Disadvantages:
- Avoid cash withdrawals: Like most credit cards, low-rate cards are not designed for making cash withdrawals – the low interest rates usually only applies to purchases
Co-branded Credit Cards
Co-branded credit cards are store or brand credit cards offered through traditional card issuers like Chase, Citi, or American Express. These can include airline credit cards that let you earn miles within a specific frequent flyer program or hotel credit cards that let you earn points within a hotel loyalty program. Some co-branded credit cards also partner with retail stores, although you can typically use them for non-store purchases as well.
Generally, the rewards offered by co-branded credit cards are limited to one brand, but their rewards are solid and in many cases, the value of these rewards (like free hotel nights) end up being worth more than cash back.