Nowadays, financial institutions offer all kinds of credit cards that have different features. It is important to understand each type of credit card to determine the type of credit card that best suits your needs. There are five major categories of credit cards: balance transfer, low-interest, rewards, secured, and specialty.
A balance transfer credit card allows you to transfer a high-interest credit card debt to a new credit card with a lower interest rate. Depending on the bank or company, the interest rate can reach as low as 0% and can typically last up to a year. If you’re often carrying a large credit card balance, this might be a good option. However, if the new credit card has a balance transfer fee and annual fee, balance transfers can get expensive.
A low-interest credit card provides either a low, fixed annual percentage rate (APR) or a low introductory APR that jumps to a higher rate at a later date. The low-interest credit card is beneficial for making a large purchase that requires several months to pay off or for people who carry long-term credit card debt.
A rewards credit card incentivizes consumers to make purchases to earn rewards. Rewards can include cash back, reward points, rebates, and airline mileage. By using the rewards credit card, you can use the cash back to reduce the credit card balance, redeem reward points to earn a free stay at a hotel, or use the airline mileage to obtain a lower priced or free airline ticket.
A secured credit card is for individuals with no credit or bad credit, who want to start establishing a good credit history. Applying for a secured credit card requires collateral upfront and the value of the collateral is usually equal to or greater than the credit limit. A secured credit card enables you to build or rebuild your credit history and eventually move on to use a traditional credit card.
A specialty credit card is tailored to meet the unique demands of a specific group of consumers, such as business professionals and college students. Business and student credit cards have the same features as traditional credit cards as well as additional benefits exclusively designed for these users. For instance, the student credit card does not require a credit history for college students to apply because most college students generally don’t have a credit history.
Written by: Cuihua Lin, Financial Wellness Peer Educator, University of Illinois Extension, 2018.
Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.