Types of Credit Cards

While all credit cards offer the ability to pay for purchases without using cash, there are significant differences between cards. The best cards are reserved for those with the best credit scores, but even those "elite" cards won't be the best option for many consumers. Here's an overview of the major card types and their typical benefits.

Standard Credit Cards

These cards offer the basics – the ability to charge purchases and pay them back over time. They tend to have few other perks, carry a middle-of-the-road interest rate, have no annual fee, and are available to those with average and higher credit scores. These cards can be a good choice for those planning to use a card rarely or for emergencies.

Reward Cards

These cards offer cash back, points, or airline miles as purchase rewards. The standard reward is often around 1% of the amount charged, though some cards now offer 2% as standard. Some cards offer even more, but on a limited range of categories (for example, restaurants, grocery stores, or gas stations).

Reward cards typically offer the best deals for those with good to excellent credit. Otherwise, interest rates may be higher than competing cards, and annual fees may apply.

These cards can incentivize spending more to earn more rewards, which could be a problem if not part of your financial plan. And remember that the interest charge on a single month's balance (or a single late payment fee) could easily cost more than the rewards you'd earn all year. Some rewards may also have restrictions, particularly those tied to travel benefits, so be informed before applying.

Co-Branded Credit Cards

These cards are partnerships between credit card issuers and specific brands or retailers. They often offer enhanced rewards or benefits when used with the co-branded company. For example, an airline co-branded card might offer free checked bags or priority boarding. In contrast, a retailer co-branded card might offer extra discounts or early access to sales.

Elite Cards

These cards may be called Gold, Platinum, or something completely different, but they all have one thing in common – they're reserved for those with the best credit.

Elite cards may include a rewards program, private services for frequent travelers, and credit limits of $10,000 or more. Many have no annual fee, but others do and are designed for high-spenders or business travelers. Some are even issued on an invitation-only basis.

Many "elite" cards are essentially reward cards with higher credit limits. Still, others make sense only for certain people – an annual fee of hundreds of dollars makes little sense for those who wouldn't use specific travel benefits and charge tens of thousands per year, for example. But for those with excellent credit, elite cards allow you to maximize the benefits you want based on your spending.

Balance Transfer Cards

Many cards offer a low interest rate on balances transferred from other cards, but others are specifically designed for those with large balances that will take months (or years) to repay. Interest rates on balance transfers may be 0% for a year or more, and the interest rates may be lower than those of other cards.

These cards offer the best deals to those with excellent credit. If your credit is anything less, they may charge an annual fee, a balance transfer fee, or reduce the time any introductory rates on transfers are offered. And remember, the low introductory interest rates may be canceled if you miss a payment or two.

Like any credit, these cards have benefits and risks. If you have a plan for reducing debt (and you can stick to it), then there's no reason to pay higher interest rates when you could pay less. On the other hand, you'll have access to more credit – making it easier to add even more debt. If you're concerned about your debt level, it's best to seek the advice of a non-profit credit counselor or other financial professional.

Retail Store Cards

Some large merchants offer their own credit cards, often marketing them at checkout with a question like "Would you like to save $50 on today's purchase?" Many store credit cards also offer other benefits, like rebates on purchases from that merchant.

So, how do these cards compare? Typically, interest rates are higher, and the rewards program is more limited than that of other cards available to people with similar credit scores.

It's one thing to make an impulse purchase now and then, but there may be better uses of your credit than signing up for a new credit card to save a few bucks on a single purchase.

Student Credit Cards

These cards are designed specifically for college students who are just starting to build their credit history. They often have lower credit limits and may offer rewards tailored to student spending habits, such as extra cashback on textbooks or restaurant purchases. Some also offer incentives for good grades. While these can be a good way for students to start building credit, using them responsibly is crucial to avoid unplanned debt.

Secured Credit Cards

A secured credit card can be an excellent option if you have poor credit or no credit history. These cards require a cash deposit that typically becomes your credit limit. This deposit acts as collateral, reducing the risk for the card issuer and making it easier for people with poor or no credit to qualify.

Secured cards are actual credit cards; your payment history is reported to the credit bureaus. So, if you plan to build or rebuild your credit, a secured card can play an important role. As you demonstrate responsible use over time, you may qualify to transition to an unsecured card and get your deposit back.

Credit Utilization and Its Impact

Regardless of the type of credit card you choose, it's important to understand the concept of credit utilization. This refers to the percentage of available credit you use at any given time. For example, if you have a credit limit of $1,000 and a balance of $300, your credit utilization is 30%.

Credit utilization is a significant factor in your credit score. Generally, it's recommended to keep your utilization below 30% across all your credit cards. High utilization can negatively impact your credit score, even if you make all your payments on time.

Remember, the best credit card for you depends on your financial situation, spending habits, and credit history. Always read the terms and conditions carefully before applying for any credit card, and consider how it fits into your overall financial plan.