Did you know that there are many types of credit cards? There are even several different ways you can categorize credit cards. For example, there are secured and unsecured credit cards. Credit cards can also be categorized based on the benefits they provide, whether it is cash back on purchases or points you can redeem.
Unsecured Credit Cards
Of all the different types of credit cards, unsecured credit cards are the most common. The best credit cards have a low interest rate or a combination of features that make it worth holding.
They may offer you free gas for purchases you already make or discounts at hotels you regularly visit. For many people, a low interest rate is good enough. Be careful about low teaser rates that jump up after a few months. For example, you might be offered 5 percent now but be hit with 25 percent interest in six months. And you may be offered a low interest rate on a balance transfer but literally pay for it with a high interest rate on any new debt you incur. Is a zero interest rate for six months on a balance transfer worth it, if you pay 30 percent on any new debt?
Unsecured credit cards can come with all sorts of rules, though these vary based on the card issuer. You may be required to pay an annual account maintenance fee, especially if it is a travel credit card or premium branded card. Store credit cards sometimes charge you an account fee if you don’t use it often enough. Don’t make the mistake of signing up for a store credit card to save 30 percent on a 30 dollar purchase and pay 30 dollars in account fees a year later. Travel and airline credit cards will put limits on when you can use their points/miles toward a desired trip. For example, they may let you redeem the 100,000 travel miles but not during busy travel times like Christmas and Thanksgiving.
Balance transfer credit cards specifically allow you to roll over your debt from one credit card onto theirs. These cards can be seen as a way to manage one’s debt, but it may enable overspending if you don’t take advantage of the low interest rate to make progress on the loan balance. If you’re looking for a balance transfer credit card, take both the low initial interest rate and how long it will last into account.
Yet there are a few rules that are common among all unsecured credit cards. For example, they’re all revolving loans. Your next payment will be some percentage of the outstanding balance, whatever it may be. Your loan balance is whatever debt you’ve racked up to date plus interest. If you don’t pay the payments, the balance will grow and could become more than the line of credit that was offered. But every secured credit card has a limit on what you can initially buy with it. This may be 500 dollars for a college student or 50,000 dollars for a small business owner who just got their first business credit card.
Secured Credit Cards
A secured loan is one that is secured by an asset of some type. For example, a car loan is secured by the car. Fail to make the payments, and they’ll come and take the car back. Because the loan is secured by something of value and the lender thus has a way to get their money back, secured loans tend to have a lower interest rate than unsecured loans. A secured credit card is one that is secured by money you put in a security deposit account.
A secured credit card is secured by money put in a deposit account. The lender generally offers the person a line of credit up to the amount in the secured deposit account. Note that a secured credit card isn’t the same as a prepaid (debit) card. If you had a prepaid card with a thousand dollars, it has a thousand dollars on it. You can spend it however you like, but you can’t spend over that limit. More importantly, it doesn’t affect your credit. A secured credit card’s history is reported to credit bureaus. If you may your payments on time, it helps improve your credit score. This is critical for those who have very bad credit. If you don’t make your payments on time, you may forfeit your collateral deposit. If you make your payments on time and in full, your credit limit may be increased. Eventually, the loan may be converted to an unsecured credit card. Then your secured deposit is refunded to you.
Charge cards are credit cards that don’t have a preset spending limit. However, they have to be paid in full at the end of the month. This means they don’t have a minimum monthly payment or charge interest. If you pay late, they may lock the card or charge you a hefty fee. While secured credit cards cater to those with bad credit, you must have great credit to qualify for a charge card.
Rewards Credit Cards
Rewards credit cards offer you something in return for using them. This may be airline travel miles or cash back on purchases. They often incentivize different types of purchases. For example, you may get more cash back for grocery store purchases over luxury purchases or greater rewards if you book both your flight and hotel with the travel credit card.
You typically pay a higher interest rate for rewards credit cards to offset the incentives to use them. You’re also somewhat locked into using them. For example, people are afraid to stop using an airline credit card until they can finally redeem the airline miles for a future trip. Unfortunately, people tend to justify over-spending with these cards because of the associated awards, and that’s the point. Spending an extra 30 percent eating out to get 3 percent cash back at a given restaurant isn’t worth it. And you’re constantly playing games and making decisions to maximize rewards, but you aren’t saving money the way you would if you were cutting coupons or hunting for discounts.
Don’t pick a reward credit card based on a single long-term goal. You may find that you can’t book your dream trip to a brand name theme park on the date you want to go. Or you may be forced to book your vacation with that airline, if you want the flight to be free, even if the scheduled flights aren’t ideal. A general purpose credit card with a low interest rate and flexible terms is a better choice for most people.