There are several different types of credit cards: regular credit cards, rewards cards, secured cards, business cards, student cards and prepaid credit cards. They all offer different benefits. Knowing the right card to pick can save money and help consumers in different ways. Subprime credit cards are expensive cards for those with bad credit and should be avoided at all costs.
Regular Credit Cards
Regular credit cards let people make purchases up to a certain credit limit and charge fees and interest for late payments and unpaid debt. Some regular credit cards also charge other fees annually or monthly or for other reasons. Regular cards are available from most banks and financial institutions.
The Capital One Platinum Prestige card is a popular standard credit card.
All regular credit card issuers make the bulk of their money from interest charges, at rates anywhere from 0% for some introductory offers to 40% or more for some high interest cards. The median credit card interest rate in the U.S. is 15%.
The credit limits and interest rates of regular credit cards are determined based on the borrower’s creditworthiness, which is figured from a mix of annual income, credit history and credit score. The card offer below from Bank of America shows rates anywhere from 14.99% to 22.99% depending on creditworthiness. That’s a huge difference. Someone who carries $1,000 of credit card debt for 10 years on a card with 15% interest pays $4,000 less interest than someone with a 23% interest rate.
Rates anywhere from 14.99% to 22.99% on this credit card offer depend on the applicant’s creditworthiness.
Balance Transfer Credit Cards
Balance transfer credit cards are attractive to people with a lot of credit card debt who don’t want to pay hefty finance charges. The cards often have 0% interest rates on transfers for an introductory period ranging from three months to two years. After that the interest rates change, as the card offer above demonstrates.
Balance transfer cards often charge a 3% fee on transfers. A consumer who transfers $5,000 in debt to a 0% card will actually pay $150. Cards with annual fees add even more charges to the transaction.
The terms of the Discover “It” credit card below show different rates on transfers and purchases. While the card doesn’t charge interest on transferred balances for the first 18 months, it does charge interest on purchases after the first six months. Anyone using this card to transfer a balance would save money by not buying anything with it beyond six months.
Balance transfer credit cards like the Discover It card often have different rates for purchases.
By contrast, the Diamond Preferred card from Citi below doesn’t charge interest on either transfers or purchases for 21 months. It does charge standard interest on everything after that.
Some balance transfer credit cards like this one don’t have different rates for purchases.
People who use balance transfer cards to avoid interest charges should shop around and find the card with the lowest fees and the longest period of 0% interest for both transfers and purchases. While balance transfer cards are a great way for consumers already in debt to lower their monthly bills, the better policy by far is to avoid getting into debt in the first place. People who pay off their credit card balances every month generally have higher credit scores and can put their money into savings, where it can earn interest instead of costing it.
Also see: Best Student Credit Card
Rewards Credit Cards
Rewards credit cards give users additional incentives for making purchases. Some offer points that can be redeemed for cash or merchandise. Frequent flier cards reward users with airline mile credits.
Capital One’s Venture card rewards users with double airline miles for every purchase. The miles can be redeemed for travel miles with any airline, and for cash and merchandise. The card has a $59 annual fee after the first year.
Rewards credit cards like this one from Citi often give cash back for purchases.
Citi’s Double Cash credit card gives rewards of 1% on both purchases and payments. A card user who buys $1,000 of merchandise on this card gets $10 when they buy and another $10 when they pay the card back. Someone who buys and pays back $1,000 a month on the card all year round “earns” $240 a year in rewards.
Bank of America’s Cash Rewards card gives consumers different rewards based on what they buy. Card users get 1% on purchases, 2% on groceries and 3% on gas. Someone who commutes a lot would get more benefit from this card than from several other card offers. While the card seems like a great deal, the rewards are capped at $180 a year.
Business Credit Cards
Business credit cards offer additional incentives to business owners, like keeping business and personal expenses separate and giving higher credit limits.
U.S. Bank’s Business Edge card comes with free employee cards and access to online business tools and resources like their Scoreboard tool for tracking business spending. The American Express Business Gold card lets users choose a spending category for triple cash rewards. The card’s owner can choose triple rewards on shipping, airfare, gas, computer equipment or other business spending categories.
Student Credit Cards
While student credit cards can have lower credit limits and less features than other cards, they offer students a way to build a good credit history. Discover’s student card has a 13% to 22% interest rate and offers double rewards at gas stations and restaurants. Bank of America’s student card has no annual fee and comes with text alerts to help busy students keep on top of their finances.
Prepaid Credit Cards
Prepaid credit cards help those with bad credit get the payment convenience of a credit card. Prepaid cards don’t help their users build a good credit history, because with prepaid cards there’s no credit being used. Instead, users pay in a certain amount of money and then use that money to make purchases. Those with bad credit can use secured credit cards to boost their credit scores, below.
The Green Dot prepaid credit card is a popular card that can do almost anything a checking account can and can be refilled at any Walmart.
Subprime Credit Cards
Subprime credit cards are available to those with bad credit, but often have very low limits and very high fees. The First Premier subprime card has a rock-bottom $300 credit limit but charges 36% interest and $170 in fees the first year.
36% interest plus relatively high fees on this subprime credit card mean most consumers with bad credit would do better to seek a secured credit card.
Consumers with bad credit should avoid subprime credit cards and instead seek secured credit cards, explained below.
Secured Credit Cards
Secured credit cards have low limits like prepaid cards and subprime cards, but they carry the benefit of helping those with poor credit to build a good credit history. Secured credit cards work in a similar way to prepaid cards, requiring a cash deposit, but they generally have lower fees and interest than subprime credit cards because they are secured by cash.
USAA’s secured credit card invests the applicant’s security deposit into a 2 year CD, so the cardholder can earn interest on their deposit.