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.

Why is building good credit important?

Building good credit is important especially if you want to finance any large purchases like your home, car, education, etc. Maintaining good credit will show creditors or lenders, whom you are borrowing money from, that you are responsible and have the ability to pay back the money that you borrow in a timely fashion. Creditors use your credit history to determine how much interest that you would have to pay on a loan. If you are considered to have good credit, you are more likely to get a lower interest rate because you are of less risk of not being able to pay back the money that you owe.

Some employers also check your credit score before hiring. An employer that is checking for credit scores during the hiring process might be looking for someone that is responsible and reliable. If you are not responsible and reliable with your money, how would you fare in a workplace where your coworkers and company will rely on you.

Maintaining good credit will show that you are financially responsible and on the right track. The economy runs on credit and if you need to borrow money, you must maintain a good credit history.

Written by: Tony Li, Financial Wellness Peer Educator, University of Illinois Extension, 2018.

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.

Why do credit card companies offer reward programs?

As counterintuitive as it may sound, offering 5% cash back on goods users purchase actually increases a credit card company’s profit margins. The reasoning behind this lies within how credit card companies generate money. (Sometimes a bank or credit union issues the credit card). First, by offering an incentive to use credit cards as a form of payment over cash or checks, it increases the probability that the financial institution will be able to collect interest on any remaining balance left unpaid.

Second, by offering enticing reward options, financial institutions can depend on users to pay more often with a credit card; this leads to more interchange fees. Interchange fees are processed and transferred to the issuer as a form of revenue when a customer uses his or her credit card. By implementing an attractive rewards program, it increases spending and thus interchange fees.

Another reason why financial institutions offer rewards is to increase their market size and attract customers in new market segments that might not otherwise be inclined to use credit cards. With a multitude of different payment options available, institutions need to offer attractive options to differentiate themselves from their competitors. Also, if a good rewards program is in place, it decreases the number of users who switch to different companies and increases the chances existing users remain loyal customers. Loyal customers mean more credit card transactions being processed, and more credit card transactions mean higher interchange fee revenue.

Credit card reward programs may sound attractive to consumers; however, they are not always beneficial. Consumers need to understand the credit card interest rate, be cautious of  how much they spend, and realize their purchasing power if deciding to participate in the reward program.

Written by: Cuihua Lin, Financial Wellness Peer Educator.

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

What is a good tool to help manage my debt?

According to a 2012 Sallie Mae report, “How America Pays”, 35% of students borrowed education loans to pay for college and, although credit card ownership has decreased recently, 35% of undergraduates have a credit card.

Credit is an important financial tool that students need to learn how to manage wisely. Learn more about how credit card debt can affect you now, as well as in the future by watching the recorded webinar, “Staying on Good Terms: Credit & Debt“.

Credit Management Tool: Use powerpay.org to help you manage your credit, pay down debt and plan your spending. This website was created by Utah State University Extension and WebAIM.org.

To learn even more about how to manage your finances while in college, including what to look for in a financial institution, you can watch another recorded webinar, Cash at College: Spending, Saving & Student Loans.

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