Credit cards offer many benefits. From providing you with a grace period for managing your purchases to keeping your finances secure, credit cards come in handy.
While most credit cards offer similar services, they have different pros and cons depending on the financial institution. For example, some credit cards are easier to obtain, while others offer more rewards. Many credit cards also come with significant drawbacks, such as high interest rates on unpaid balances.
When choosing a credit card for yourself, it’s essential to pick one that meshes your long-term financial goals. The five primary types of credit cards are listed below to help you decide which one is right for you.
1. Secured Credit Card
A secured credit card might be the ideal option for consumers who don’t have the credit or want to improve their credit score. It might help think of a secured credit card as a “credit builder card.” Unlike traditional credit cards, you must deposit before getting approved. The amount of your deposit then becomes the card’s credit limit.
While putting money down might seem counterintuitive, your deposit acts as a safeguard. It puts a cap on the amount you can spend to keep spending under control. For example, if you put down $1,000, your credit limit will be $1,000. Cardholders are still charged interest if they don’t pay off the full balance at the end of the month.
This type of card works best for consumers who use it for everyday purchases but then pay it off at the end of each month. If you can’t pay your full balance every month, this is a sign that you need to adjust your spending. When choosing a secured credit card, be sure to pick one that reports account holder information to all three major credit bureaus. This way, your activity will improve your credit score.
2. Unsecured Credit Card
Better known as a “traditional credit card,” unsecured cards are probably the most familiar type. These accounts don’t require a deposit but typically provide users with a line of credit and various cardholder rewards. For example, some unsecured cards offer customer rewards such as cashback, points, or airline miles.
Of course, unsecured cards aren’t perfect, either. Unlike secured credit cards, it can be challenging to get approved for an unsecured credit card as financial institutions typically require a decent credit score. If you don’t have a low or no credit score, you might not find a bank willing to approve you for an unsecured card.
As these cards don’t require a deposit, they may offer a higher line of available credit than you’re prepared to manage. This might not be a problem if you’re skilled at managing your money. But if you’re not, it’s all too easy to spend money you don’t have and end up in debt.
According to research, the total American credit card debt reached approximately $980 billion during the first quarter of 2021. While unsecured credit cards are standard, they might not be the best option for your wallet or your long-term financial goals.
3. Travel Cards
While the pandemic might’ve put a damper on your travel plans, the world just might be slowly getting back to normal. This might mean that you’re gearing up to start traveling again. If so, a travel card might be a good option for you.
When choosing a travel card, airline credit cards and travel credit cards are your two primary options. The purpose of these cards is to help you save money when you travel. Depending on how much money you spend, you could earn free airline flights or even get cashback.
Airline credit cards are associated with a specific airline such as Southwest or American. With these cards, you typically receive several perks such as airport lounge access, priority boarding, in-flight discounts, and so forth. As you might expect, you also earn points whenever you fly that can pay for other flights.
Travel credit cards, on the other hand, aren’t generally associated with a specific airline. So while you probably won’t get airport lounge access, you’ll still earn points toward flights (regardless of the airline), hotel rooms, and even dining.
The bottom line is that travel credit cards are for travel-related expenses. Airline credit cards are only beneficial if you’re a frequent flyer. Both options offer benefits, but they also come with annual fees. Be advised that you might need a good credit score to be approved.
4. Student Credit Card
Student credit cards are similar to both unsecured and secured credit cards. While a deposit isn’t typically required, the line of credit is usually on the lower side. This represents an intentional attempt to keep students from overspending and acquiring a great deal of unsecured debt. These cards are an excellent option for students because they usually come with unique features.
For example, students are provided with financial resources and support. From payment alerts to advice, students learn how credit cards work in real time. Rewards are usually targeted toward the college-age crowd. Instead of flight miles, student credit cards offer rewards on gas, restaurants, and more. If you want to start building credit without taking on many risks, a student credit card is a solid option.
5. Business Credit Card
Do you own your own business? You might want to consider getting a business credit card. One of the main benefits is keeping your business expenses and your everyday expenses separate. This comes in mighty handy during tax season. It also increases the number of rewards you could potentially accrue.
A business credit card typically works the same way as a traditional card. You’re given a grace period on purchases, earn rewards, and build your credit score. Building business credit is just as important as building personal credit. Let’s say you need to apply for a company loan. Being able to show any lender your business credit score will work in your favor.
Use Good Judgment When Making Credit Card Decisions
There are several different types of credit cards, all with their benefits and drawbacks. Some credit cards are best suited for college students, while others can help you grow your small business. Because of these differences, it’s essential to know what your financial goals are before you pick a credit card.
Are you comfortable with a high interest rate if that means you could potentially earn more rewards? Or do you want a credit card that will help you build your credit score? By answering these questions and others, you’re far more likely to find the right option for your wallet.