What are the different types of credit cards?

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.

For more detailed information, you can visit Credit.com or Bankrate.com to browse and compare various types of credit cards.

Written by: Cuihua Lin, Financial Wellness Peer Educator, University of Illinois Extension, 2018.

Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

When should I use my credit card vs. debit card?

Many people are fear of using credit cards because of the risk of overdrafting, high interest rate and fraud. Some of these worries are not necessary. Nevertheless, when we need to swipe our cards, we should choose between credit card and debit card wisely depending on the situation.

Best situations to use credit cards:

  1. Shopping online: Credit cards are highly recommended if you are shopping online. Purchasing by debit card is just like paying cash. It is hard to get your money back once someone else makes a purchase by your debit card online. However, if you purchase by credit card, it is NOT like paying cash. Many credit card companies offer “zero liability” policies, which means that if you dispute a transaction within a few days that wasn’t authorized by yourself, you needn’t pay for it.
  2. Making large purchases: The credit liability policy also works pretty well for large purchases. In addition, some credit card companies offer warranty policies that go beyond the manufacturer.
  3. Making reservations, buying tickets: Many companies only accept credit card online reservations because of safety concerns. Also, it is possible to get discounts or cash-back when you use a credit card to make reservations.

Situations to use debit cards:

  1. Purchasing a small amount of goods: Debit payment is similar to cash payment, so it is more convenient to use a debit card to make routine purchases than a credit card.
  2. Automated payments: some types of payments can made automatically by using a debit card, which can make your life more convenient.

It is still risky to use a credit card without carefully planning. Nevertheless, using credit cards has a lot of advantages that debit cards do not have.

Written by Bowen Song, Financial Wellness Peer Educator, University of Illinois Extension, 2017.

Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.

Is it better to pay your monthly credit card balance in full, or just the minimum?

There are pros and cons to both choices, as each can affect your overall finances and credit score.

Advantages of paying the entire balance at once include not paying interest fees, not maxing out on your credit card’s limit and the decrease of your credit utilization ratio. The credit utilization ratio is how much you owe compared to your credit limit. The lower the ratio, the better your credit score.

Unfortunately, paying off your entire balance means not having money for other purchases. If you are low on cash or have any major expenses coming up, paying your entire balance might not be the best idea.

What are the advantages of paying only the minimum credit card balance? It allows you to focus on paying your current finances and bills. If you’re short on cash, you only have to pay a small amount of the balance.

When you don’t pay off your total credit card bill, interest costs as high as 25% or more (depending on your credit card’s policy) will be added to your balance. This will likely take more time to repay depending on the minimum amount and the total balance.

As noted, there are multiple advantages and disadvantages towards paying only the minimum or the entirety of a credit card balance.  In the end, it is your job to decide which option is more ideal.

Written by Solomon Lowenstein, Financial Wellness for College Students Peer Educator, University of Illinois Extension.

Reviewed by Kathy Sweedler, Consumer Economics Educator, University of Illinois Extension.