When it comes to credit cards, there are a lot of different kinds of them. It can be confusing to know which one is right for you.
Table of Contents
In this blog post, we will discuss the different types of credit cards and what each one offers. We will also talk about APR and how it affects your credit card use.
By the end of this post, you will have a better understanding of the different types of credit cards and be able to choose the right one for you!
What Are The Different Kinds of Credit Cards?
There are four main types of credit cards:
- Rewards credit cards
- Cash back credit cards
- Balance transfer credit cards
- Business credit cards
Type of Credit Card #1 – Rewards Cards
Rewards credit cards are the most popular type of credit card. This is because they offer reward points for every purchase you make. The more you spend, the more points you earn. These points can be redeemed for cash back, gift cards, travel, and more.
However, sometimes the points can only be redeemed for travel through the credit card’s website or portal. That’s why it’s important to read the fine print before signing up for a rewards credit card. If you aren’t a traveler, then a rewards card probably isn’t the best choice for you.
Rewards credit cards typically have an annual fee and a higher APR than other types of credit cards. However, if you are a frequent spender, the rewards can outweigh the cost. This is because you are essentially getting paid to use the card.
Benefits:
- Earn points for every purchase
- Points can be redeemed for cash back, gift cards, travel, and more
Disadvantages:
- Annual fee
- Higher APR
Who Shouldn’t Get It: People who don’t spend enough to earn the rewards won’t benefit from this type of card. People who carry a balance from month to month will also not benefit as much because of the higher APR. This can lead people to be in debt and not be able to pay off the full balance each month.
If the rewards don’t match your preferences, you probably won’t benefit from this type of card. You’ll want to consider other options like cash back credit cards because you can choose what you want to spend the cash on.
If you can’t pay off your balance in full each month, a rewards credit card is not the best option for you. You don’t want to hurt your credit score and damage your financial wellbeing. Here are some more details about the other types of credit cards that might suit you better.
Type of Credit Card #2 – Cash Back Credit Cards
Cash back credit cards offer a percentage of cash back on all of your purchases. For example, you may get 0.50% cash back on all purchases. Some cash-back credit cards also offer bonus categories where you can earn more cashback. For example, you may earn 1% cash back on all gas purchases.
This means if your total purchase amount for gas was $100, you’d get $1 back. But if you purchased an item or service that did not offer a bonus, you’d get $0.50 back.
Cash back credit cards typically have no annual fee and a lower APR than rewards credit cards. However, some credit card companies might charge fees. That’s why it’s important to make sure you understand the terms and conditions before signing up for this type of card. If you are not a frequent spender, this type of card may be the better option for you.
Benefits:
- Get a percentage of cash back on all purchases
- No annual fee
- Lower APR
Disadvantages:
- Cash back may be less than rewards points
- Might have fees (read terms and conditions)
Who Shouldn’t Get It: As with any credit card, if you can’t pay off your balance in full each month, this card is not the best option for you. If you don’t spend enough to get the cash back, you also won’t benefit from this type of card. People that don’t spend much may be better off with a secured credit card.
Type of Credit Card #3 – Balance Transfer Credit Cards
Balance transfer credit cards allow you to transfer your high-interest debt from another credit card to a new card with a lower interest rate.
For example, let’s say you have $5000 in debt on a credit card with an APR of 20%. You could transfer that debt to a new balance transfer credit card with an APR of 15%. This can be a strategic way to save on interest and pay off your debt faster.
The downside to balance transfer credit cards is that they typically have an annual fee (approx. $50-$100). And, if you don’t pay off your debt within the intro period (usually 12-18 months), you will be charged a higher APR.
Benefits:
- Save on interest
- Pay off debt faster
Disadvantages:
- Annual fee
- Higher APR after the intro period
Who Shouldn’t Get It: If you don’t think you can pay off your debt within the intro period, this is not the card for you. The fees and interest will add up quickly and you’ll end up in more debt. Also, if you don’t have any debt to transfer, this card will not be beneficial for you.
Type of Credit Card #4 – Business Credit Cards
Business credit cards are designed for business expenses. If you have a small business, this type of card can help you manage your business finances and expenses. Business credit cards typically have more flexible spending limits and may offer rewards like cash back or points.
The main difference between business and personal credit cards is that business credit cards report to business credit reporting agencies. This can help you build your business credit score.
Benefits:
- Rewards like cash back or points
- Builds business credit score
- Manage business expenses
- Flexible spending limits
Disadvantages:
- It may require good to excellent credit to qualify
- Can come with higher APRs
Who Shouldn’t Get It: If you don’t have a small business, this type of card is not for you. This is because you can only use business credit cards for business expenses. If you try to use it for personal expenses, you may be charged a higher APR.
Also, if you have bad or no credit, you will not be able to qualify for this type of card. Secured credit cards are a better option if you’re trying to build your credit score. Let’s explore these two options that can be selected with the type of credit card.
Secured Credit Cards vs Unsecured Credit Cards
It’s also important to mention the differences between secured and unsecured credit cards. A secured credit card is a type of credit card that requires a security deposit. The deposit is equal to your credit limit. So, if you have a $500 credit limit, you will need to make a $500 security deposit.
The main benefit of a secured credit card is that it’s easier to qualify for than an unsecured credit card. This is because the credit card issuer has your security deposit as collateral. That means they’re less at risk if you default on your payments.
If you default on your payments with a secured credit card, the issuer can keep your deposit and close your account. This can be detrimental if the collateral is valuable to you but if you’re trying to build or rebuild your credit, a secured credit card can be a good option.
Secured credit cards can also have the potential to offer a lower APR and higher credit limit than unsecured credit cards. But, it’s important to note that not all secured credit cards offer these benefits.
Unsecured credit cards don’t require a security deposit. But, they typically require good to excellent credit for approval. If you’re trying to build your credit, you may want to start with a secured credit card. Once you’ve built up your credit score, you can transition to an unsecured credit card.
The main benefit of unsecured credit cards is that they don’t require a security deposit. But, they typically have higher APRs and lower credit limits than secured credit cards. This can cause a lower monthly cash flow and a higher probability of going over your credit card utilization ratio.
With a higher APR, you’ll also end up paying more in interest if you carry a balance on your unsecured credit card. So, if you’re trying to pay off debt, an unsecured credit card may not be the best option for you.
A credit card utilization ratio is important for credit score because it shows how much of your credit limit you’re using. It’s recommended to keep your credit card utilization ratio below 30%. That means if you have a $1000 credit limit, you should keep your balance below $300.
If you have a higher credit card utilization ratio, it will lower your credit score. So, if you’re trying to improve your credit score, you should keep your credit card utilization ratio low. The best way to do this is to pay your credit card balance in full every month. That way, you’re not paying interest and you’re not using a high percentage of your credit limit.
Bonus Type: Prepaid Credit Cards
Prepaid credit cards are a type of credit card that you load with money. You can use the prepaid credit card to make purchases and pay bills. When you use the prepaid credit card, the funds are deducted from your balance. So, they technically aren’t credit cards because you’re not borrowing money. But it’s still worth mentioning.
Prepaid credit cards are a good option for people who want to avoid debt. This is because you can’t spend more than what you have loaded on the card. Prepaid credit cards are also a good option for people with bad credit because they’re not tied to a credit line.
Some prepaid credit cards also offer rewards but they typically have fewer rewards than traditional credit cards. And, prepaid credit cards typically have higher fees as well. Some fees such as an annual fee, monthly fee, and transaction fees might apply to this type of card.
The main downside of prepaid credit cards is that they don’t help you build credit. This is because prepaid credit cards are not reported to the credit bureaus. So, if you’re trying to improve your credit score, a prepaid credit card is not the best option for you.
Which type of credit card is right for you?
If you’re trying to decide between a secured and unsecured credit card, it’s important to consider your credit score and your financial goals. If you have bad or no credit, a secured credit card can be a good option to help you build your credit score. If you’re trying to improve your credit score, an unsecured credit card may be a better option.
It’s also important to consider the APR, credit limit, and credit card utilization ratio when you’re choosing a credit card. A higher APR can cause you to pay more in interest if you carry a balance on your credit card. And, a lower credit limit can cause you to have a higher credit card utilization ratio. So, it’s important to choose a credit card with a low APR and high credit limit.
If you’re trying to pay off debt, a balance transfer credit card can be a good option. These types of credit cards offer 0% APR for a promotional period. That means you can transfer your balance to a new credit card and pay no interest for a set period of time. Just be sure to pay off your balance before the promotional period ends.
If you already have an excellent credit score and you want to avoid debt, a prepaid credit card can be a good option. But if you want to maximize rewards and keep building credit, a cash-back credit card may be the best option for you. A rewards card is great if your lifestyle matches the benefits it offers.
What Are The Different Kinds of Credit Cards? (conclusion)
There are many different types of credit cards available and it can be confusing to try to figure out which one is right for you. But, if you know your credit score and your financial goals, it can be easier to choose the right credit card.