When it comes to choosing a credit card, the options can be overwhelming. Besides the fact that there are many credit card issuers, there are also many types of cards to choose from. And although they might all seem to be the same on the surface, different types of credit cards can help you accomplish totally different goals. To illustrate how, here’s a breakdown of what types of credit cards there are.
Credit Cards Come in Many Varieties
Business Credit Cards
You might consider a business credit card not only if you’re running a traditional brick-and-mortar business, but also if you’re a freelancer. That way, it’ll be much easier to keep your business expenses separate from your personal expenses. This can be helpful not just for budgeting, but also for tax preparations.
However, if you’re a full-time employee and not a business owner or freelancer, this type of credit card won’t work for you. If you do run a business and are not a sole proprietor, you’ll need your employer identification number (EIN) to apply, among other things such as legal information about your business and potentially even a personal guarantee tied to your personal credit.
Credit Cards for People With Bad Credit
There are credit cards marketed specifically to people whose credit needs work — but they should come with a warning label.
The positive of bad credit credit cards is that they are relatively easy to get if your credit isn’t in great shape — some don’t even require a credit check. The negative is that they can come with very high interest rates and excessive fees, as well as low credit limits.
There are other types of credit cards that may be used to help you build credit that come with fewer fees and lower interest rates. If you have a little bit of money that you can put down, a secured credit card can help you rebuild your credit without costing you the amount in fees you might pay for a bad credit credit card. But if not, bad-credit credit cards are an option you can use until your credit improves enough to qualify for more traditional credit cards.
Balance Transfer Credit Cards
It might sound counterintuitive, but this type of credit card can be used to help people pay off credit card debt. Balance transfer credit cards typically offer a promotion of no interest on balances transferred from another credit card for several months to a year or even longer.
Not having to pay interest right away means more of your payments go straight to that balance and help you pay it down faster than if you were to keep it on a traditional credit card. On the flip side, if you still have a balance when the promotional rate is up, it will be charged at the card’s purchase APR. At that point (or right before that), some people end up doing another balance transfer so they don’t get hit with the interest and have more time to pay off the debt.
Retail Credit Cards
If you’ve ever been shopping at a store and the sales associate offered a discount in exchange for being approved for a credit card, then you were likely offered a retail credit card. This is becoming more prominent for online purchases, as well.
Retail credit cards, not to be confused with store charge cards, are traditional credit cards that are issued by a bank, but sponsored (so to speak) by a particular retail outlet. These can be a good idea if you shop at a particular place quite often and can benefit from their discounts that come only with their branded card. That said, applying for a retail credit card every time you make a purchase just to get the discount can damage your credit score. That’s because every credit application you make can take a few points off your scores.
This is not something to worry about if you don’t apply for credit frequently, but doing it at a pace of once a month, for example, could take a toll.
Rewards Credit Cards
Perhaps the most popular credit card type out there, rewards credit cards can be used to earn cash back, points, or travel miles. These are good credit cards for people who plan on using credit cards for most of their purchases, but can also pay off those purchases each month before interest begins to accrue. After all, earning rewards doesn’t do much for you if you end up paying more than they’re worth in interest.
The idea behind rewards credit cards is to pick the one with the kind of rewards you’ll actually use. If you don’t travel much, cash back cards might be a better choice than points or miles, for example. What’s more, it takes some digging to find out whose rewards are worth the most in terms of cash value, as the number of points and miles they offer doesn’t necessarily translate one-to-one.
Secured Credit Cards
Secured credit cards are designed for people who need to build or rebuild their credit. Here’s how they work: You put down a security deposit (many of these cards designate a minimum and maximum or different tiered amounts), and that can sometimes end up being the same amount as your credit limit. Some, however, do offer a higher credit limit than your security deposit.
These credit cards don’t typically have a high enough credit limit to bail you out in a large emergency, but they can help you establish credit and, if used properly, learn good habits like paying off your balance every month, that will ultimately improve your credit. What’s more, secured credit card issuers often have a policy of reviewing your account after a few months to see if your credit scores have improved enough for you to upgrade to a traditional credit card. If you’ve paid your balance in full, you should get your security deposit back at that point.
Student Credit Cards
Since most college students are young enough that they likely haven’t built credit yet, student credit cards are a type of credit card that can help do just that. Many don’t even require a FICO® score, though some do require a co-signer and/or proof of income.
A benefit of these cards is that they often come with lower credit limits, giving students a chance to try out credit while hopefully preventing them from plunging deep into debt. They also often offer lower fees and other benefits like no interest for the first several months. These cards can even come with rewards and benefits such as a statement credit for good grades. And, like many other credit cards, some student cards let card holders see their credit scores. That can enable the students to see how their card usage impacts their credit.
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On Choosing the One That Will Work Best for You
It may not be easy choosing from the wide variety of credit cards out there, but it is important to choose wisely. Besides building credit habits that keep you out of credit card debt, picking the right credit card can help you get the most out of the credit you use.
Whether it’s to help you earn rewards, build credit or pay off debt it never hurts to take the time to do your research so you can end up with a good match.