Different Types of Credit Cards

Credit cards at one time were called charge cards, after the type of accounts that they ended up replacing, charge accounts with a merchant. These accounts were set up for convenience purposes mostly, and did offer buy now pay later but not much later, like you can do with an actual credit card.

So charge cards did offer credit but it was fairly short term credit, you couldn’t pay the thing off over a period of years for instance, and in fact the entire balance is due with these cards when the bill is rendered. American Express up until fairly recently only offered charge cards.

American Express still offers charge cards, although most cards these days are credit cards, and even American Express offers credit card options these days. Credit cards require only a minimum payment to be made if one wishes, a small percentage of the amount owed which will even allow the current balance to be paid back over a number of years instead of right away.

The best use of a credit card actually involves using it as a charge card though, even though it may offer the ability to spread out your payments over time. This involves paying interest though and interest rates on credit cards are generally inferior to bank rates on revolving credit, which is what credit cards are a form of.

So for instance you may be able to get a line of credit at a bank for half, a third, or even a quarter of the interest that your credit card charges, depending on how good your credit is. Some may be able to qualify for a credit card but not a bank line of credit though, so this might not be an option, but in any case it’s best not to have to pay interest if you don’t have to, and paying off your purchases within the grace period avoids paying any interest at all.

Different Types of Credit CardsCredit card companies make money off your purchases as well as interest though, by charging merchants a fee for processing, and this is why American Express is famous for its higher fees, because at one time that’s the only way they made money. Credit card companies, making money off of both fees and interest, can afford to charge less for fees.

Charge cards are more popular for business purposes, where the business has no intention of carrying over the balances and has the means to avoid ever doing so, and if they need to borrow, they aren’t going to do so by way of a credit card and have better options available to them.

Some individuals are in that situation though and will use a charge card as well, often in conjunction with credit cards and other means of borrowing. So charge cards don’t take away one’s ability to borrow overall beyond 1 month, they just don’t offer it themselves.

Charge cards do have the benefit of the card issuer not necessarily needing to cap your spending limit like credit cards do, as it’s based not so much on credit as on spending habits, so if you need to spend a little more during a given month then it may be reasonable to accommodate you, without needing to get formal approval for a  credit limit increase. This is seen as an advantage by some cardholders.

Credit Cards

So while at one time charge accounts were all there was, prior to the coming of the credit card, and not all cards that ended up being offered as a replacement for charge accounts offered long term credit options, credit cards ended up taking over as by far the most popular option, as even though a lot of people intend to pay on a monthly basis, credit cards also offer the option to spread it out should one need to or want to.

A lot of people finance purchases through credit cards, even though there may be better options available to them. This is partly due to the convenience of using a credit card over applying for a line of credit at a bank, in addition to some people not being fully aware of what their options are.

So when one meets with a banker to review their financial situation, it is customary to take stock of their current debts, especially high interest credit card debt, to see if the amount of interest they are paying can be reduced by consolidating it at into a lower rate product like a debt consolidation loan, a line of credit, or into their mortgage.

A lot of people don’t have the proper education on how to manage their own personal finances though, and this leads them to pay too much interest in a lot of cases, which not only costs you more money but can lead to financial instability and even default. If your interest payments are too high this can lead to your not having enough money to keep up with the payments, where you may have been able to afford more modest interest terms.

So there are two main ways to use a credit card, using it as a charge card and not paying interest, or using it as a line of credit and making partial payments including paying interest.

If you’re not paying interest then the rate may not even matter to you, and it won’t for sure if you have adequate means to borrow aside from the credit card. So for instance your credit card rate may be 20% but if you have a line of credit at 5% we’ll say, and will be using that if you need to borrow beyond the one month, who cares how high the rate on the card is really.

How Credit Cards Differ

Major credit cards can be used at a wide variety of places. Virtually everyone takes Visa and MasterCard for instance. American Express is also widely accepted but some merchants don’t take it due to the higher fees they charge.

Other cards, like Discover, may be more accepted in some countries rather than others, Discover is widely accepted in the U.S. for instance but in other countries you may have a problem with merchants accepting it due to its lack of popularity.

Retail credit cards can only be used with the specific merchant that issues it, although if you do business with a particular merchant regularly than it may make sense to get their card, especially if it comes with incentives you want to take advantage of such as interest free options over a set period of time.

Aside from the interest rate offered on the card, which may or may not matter, some cards come with annual fees that must be paid by the cardholder. Cards are widely available without annual fees though should one not wish to pay them, and you do want to make sure that if you do pay this fee you are getting your money’s worth over other cards without the fees.

In an effort to attract new business, some cards come with introductory incentives such as a lower initial rate, an opportunity to transfer balances from other cards at an even lower rate, or a reward bonus.

Many credit cards have a rewards program and it generally makes sense to use cards that do provide you rewards, since the cost of these rewards is primarily borne by the merchant. So what credit card companies do with rewards programs is share part of the fees that they collect from merchants with you, by way of either cash back offers or through a points system leading to merchandise or travel.

Getting a percentage or two of all your purchases on a credit card may not sound like all that much, but this can really add up at the end of the year. In these cases it makes a lot of sense to put everything on your cards, and the rewards you get back for this are generally well worth it.

Of course to use this strategy properly you would be looking to avoid paying interest, so they end up paying you for using the card rather than the other way around. Some reward cards come with annual fees so you want to make sure that the additional rewards they offer over what you could get with no annual fee options make this worth it for you.

Prepaid and Secured Credit Cards

Some people get confused with prepaid credit cards, and these cards are actually in no sense a credit card, since there is never credit involved with them. They are actually prepaid debit cards, in spite of their being called credit cards by people and even issuers.

Some people can’t qualify for a credit card and perhaps by calling these some sort of credit cards people may feel a certain sense of prestige that they may have felt was lacking. In any case, with prepaid cards, one just loads money onto them, in addition to paying administration and maintenance fees, and then they can be used to purchase things.

Many people use prepaid cards to purchase items online, in the interests of security, and while it’s certainly true that there is less of a security risk with them over credit cards, the risk in these cases is borne by the credit card issuer, as all credit cards have fraud protection.

So while sometimes people can be the victim of credit card fraud, it’s only a minor inconvenience as you don’t have to pay for these fraudulent purchases as a rule, and the credit card company will just cancel your card and issue a new one. You will be without the card in the meantime but that shouldn’t be a big deal, although one still needs to prepare for these events by insuring that you have a backup plan.

Secured credit cards are actual credit cards where you put down a security deposit in case of default. These cards usually offer terms, such as fees and rates, that are not as good as standard cards, but they are a great way to not only obtain a real credit card in cases where you wouldn’t normally qualify due to poor credit or other reasons, and can also help rebuild your credit if that is needed.

Other than the security deposit, these cards work exactly like normal credit cards do, you will pay interest if you don’t pay it off month to month in other words, as they don’t use your deposit unless you default and they would otherwise close your account and send it to collections.

A lot of people that do have poor credit could and often should take advantage of secured cards, as building credit is an asset that you generally want to have. Some people just can’t handle credit though from lack of discipline or other reasons and in some cases, not having access to credit either temporarily or even permanently may be the best option overall for them.

So credit cards come in a number of forms and with a variety of terms and this is something that if usually pays to shop around with, as it is the case with many things.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken: [email protected]

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