Understanding how different credit cards work can help you get the most out of the plastic in your pocket and ensure that they help—rather than hurt—your short and long-term financial goals. If you know how to use credit cards wisely (and have the self-restraint to do so), they can be helpful in a DIY approach for getting, or keeping, yourself out of debt.
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How many different types of credit cards are there?
Credit cards can be really useful financial tools. They can increase your buying power and demonstrate to potential lenders that they can trust you. But some types of cards are more helpful than others and there are a lot of different credit cards to choose from.
The types of credit cards can mostly be broken down into a few main categories: the specialty of the card (its perks, so to speak), how the credit line is established, and the credit card issuer.
The 8 types of credit card perks
Most people categorize the different types of credit cards by the benefits or rewards that credit card offers. How these perks fit into their overall financial strategy will strongly influence how that card is used. It will also affect the best way to use a credit card to avoid credit card debt.
Rewards credit cards
This is one of the broadest types of card categories. Rewards cards encompass all of those that allow users to earn something for their purchases. These rewards might be in the form of cashback, points, miles, or perhaps discounts on specific purchases. Additionally, these cards tend to offer the biggest and flashiest perks like signup bonuses or statement credits for shopping with certain retailers.
But rewards cards aren’t for everyone. They often have annual fees attached to them and carry the steepest APRs, making them a major liability for those who sometimes carry a balance. Furthermore, only those with great credit will get approved for best reward credit cards. For the millions of Americans with Good credit or lower, rewards cards are out of reach.
Rewards cards have a lot to offer—but only to those who have proven themselves exceptionally creditworthy.
Travel credit cards
A subset of reward cards, travel cards are those issued from various travel-related entities such as airlines, hotel chains, rental car companies, or third-party travel booking sites. Travel rewards cards typically offer rewards in the form of points that are redeemable for free or discounted bookings, along with elevated membership status.
You may be able to get discounted travel through their web portals when you use your points. There are usually additional perks you get with these cards, such as access to lounges or concierge options.
Similar to cashback or points-based rewards cards, travel cards also have some of the highest credit card APRs and are unforgiving to those who don’t pay off their balance every month.
Balance transfer credit cards
There are some types of credit cards that aren’t designed for making new purchases, but rather to take on your existing debt. These are known as balance transfer cards.
They offer promotional low or 0% APR for balance transfers for 6 or even 20+ months. Individuals who move balances over to the new balance transfer card can enjoy up to two years of interest-free payments.
Balance transfer cards are a great option for buying yourself time if you need a bit of breathing room for paying off large balances. Note, a promotional APR for balance transfers is different from the APR for purchases.
Low APR credit cards
Low interest credit cards are exactly what they sound like: credit cards with below-average interest rates for purchases. These cards are a great option for those who sometimes carry a balance and want to avoid steep penalties for doing so.
The tradeoff is that they are typically pretty bare-bones and don’t come with many other perks. But in the long run, it’s much more cost-effective to pay less in interest charges than any cashback, points, miles, or other rewards you might have earned with a rewards card (which typically have a valuation of one cent or less).
Keep in mind that with higher interest rates, most credit card rewards are offset by interest charges within two to three billing cycles.
Store credit cards
Store cards are issued by retailers and brands such as Starbucks, Target, and Disney. They offer store-related incentives like exclusive discounts or membership perks, early access to sales, or the option to make large purchases interest-free.
One thing that makes store cards unique is that sometimes these cards can only be used for purchases at that retailer. This is known as a closed-loop card. Whether you end up with the closed or open loop version of a store card (a card that can be used, and possibly earn rewards, anywhere that credit cards are accepted) is determined by creditworthiness; you don’t get to specify which version you want.
Cards issued by retailers typically have lower credit requirements than most other credit cards and can be much easier to get approved for. In some cases, there may not even be a credit check. But watch out for the high APRs that can be just high as reward card APRs.
Some credit cards require collateral in order to get a line of credit, similar to a security deposit needed to rent an apartment. These are known as secured cards. Aside from this difference, they’re full-fledged credit cards that function the same as any other credit card.
Secured cards are geared towards those with bad credit or no credit. The limitations are obvious—you can only have as much credit as you can afford to set aside. But for someone who recently declared bankruptcy or can’t get approved for any other card, secured cards are a slow and steady way to rebuild your credit report.
Business credit cards
Business cards are intended for entrepreneurs and business owners who want to keep business-related charges separate from their personal ones (though you’re not required to have your own business to qualify for one). These credit cards often offer rewards as well including cashback, points, and travel rewards. There’s no real benefit to having a business credit card for someone who’s trying to avoid credit card debt or fees.
Student credit cards
Student cards are geared towards those who don’t have much (if any), credit history. They typically have less stringent eligibility requirements, but also lower credit limits and limited opportunities to earn rewards on purchases. To qualify, you just need to be at least 18 and have proof that you’re enrolled in school.
Secured vs unsecured credit cards
A much broader categorization of types of credit cards is whether it’s a secured card or an unsecured one. As mentioned before, a secured card is one that requires something like a security deposit. The amount you put down will determine your credit line.
By contrast, unsecured cards are those that don’t require any collateral. You simply apply for the card and based on your creditworthiness and income, that card issuer will determine your credit limit for that card. Unsecured cards make up the bulk of the different types of cards.
For the most part, secured cards work just like regular credit cards:
- They can be used to make purchases in-person and online
- Have fees for late or missed payments
- Your payment history is reported to credit bureaus
One key difference (aside from the required cash deposit) is that secured cards tend to have higher interest rates and fees. Depending on the card issuer, however, you may be able to upgrade to an unsecured card after displaying responsible card usage after a few months or a year.
Types of credit card networks
Another way you might hear someone refer to different credit card types is by differentiating the different credit card networks. You’re likely familiar with the four biggest names in the U.S.: Visa, Mastercard, American Express (AMEX), and Discover.
But credit card networks don’t play much of a role in how your card works or the benefits it offers. The networks deal with processing transactions and make their money from transaction fees that they charge the merchant. It’s credit card issuers like Wells Fargo, Capital One, or Bank of America who determine reward structures, interest rates, and fees, and manage the credit card accounts and applications.
The only instance where the credit card network makes any real difference to shoppers is that some merchants may only accept cards from one but not others. Usually because of the difference in their fees. Some networks are also more widely accepted abroad which can make cards issued by certain networks more appealing than cards backed by another. Visa and Mastercard are the most widely accepted in the U.S and worldwide, followed by Amex and Discover.
The best card types for someone in debt
Credit cards might seem an unlikely ally in becoming debt-free, but a well-timed card that’s used strategically can improve your financial well-being. Whether you’re currently in debt, trying to avoid debt, or somewhere in between, here are the best types of credits that can be used to your financial advantage (plus: how to use them effectively):
Best type of credit card if…you have a lot of preexisting credit card debt.
The average credit card has an interest rate that’s a little over 16% (and if it’s a rewards credit card that APR is probably closer to 20% or more). If you’re not paying off that balance every month, you’re adding nearly a fifth of that to your new total and then being charged more interest because of that higher balance. It’s a slippery slope that many people find themselves unable to dig themselves out of.
If you had a balance of $1,000 on a credit card with 16% APR and only paid the minimum, it would take nine years to pay off and cost you $1,409 in interest. A 0% APR period or any length would pause the accumulation of interest charges and could save you a decent chunk of money.
Bear in mind that balance transfers typically require a fee of 3% or 5%. This fee will be tacked onto your total balance; it’s not charged upfront. Even though no interest is being charged, you’ll still need to make minimum payments.
For the greatest cash savings, pay off your balance entirely by the time the promotional APR period ends. You could potentially keep transferring your balance to different offers, but doing so will require an inquiry on your credit report each time–a ding to your score that you might not be able to afford. The other reason you might not be able to pull this off is that balance transfers are usually only available to those with the best credit scores.
Best type of credit card if…you usually carry a credit card balance.
If you don’t have the credit to get approved for a balance transfer card or might not be able to make consistent payments, a low APR card might be a great fit. These credit cards have interest rates that are lower than the industry average (there’s no official definition of what’s a low APR) and can make it more affordable to carry a balance.
Note that low APR is not the same thing as 0% APR. The latter is a temporary interest rate sometimes offered as a perk for new cardholders. Once that promotional zero-interest period ends, the regular APR will apply.
So why choose a low APR card over a zero APR card? That 0% interest is temporary. You only stand to gain if you are able to pay off your entire balance by the end of the promotional period and can reliably make the minimum payments. Most card issuers will instantly cancel your 0% interest if you miss one. You’d then end up with yet another credit card with a high APR.
Best type of credit card if…you have a large upcoming purchase and need some breathing room to pay it off.
Credit cards with zero-percent introductory offers may not benefit everyone, but they certainly have their usefulness for someone wanting to minimize debt. Say you have a large one-time purchase coming up: your washer machine broke, you’re planning a vacation, you need a new laptop. A 0% APR card could give you up to 18 or more months to pay that off interest-free.
To use this card effectively in a debt payoff strategy, you’ll need to pay off the entire balance by the end of the promotional period. Whether your plan is to make even payments split over the length of the 0% interest period or a lump sum on the last month–as long as you’re not carrying a balance once the regular APR applies, you stand to save money.
Keep in mind that the best no-interest offers are reserved for good or better credit scores. Additionally, they’re usually only offered rewards credit cards so you’ll have a high APR once the promotional period is over.
Best type of card if…you need to rebuild your credit to improve your odds of getting approved for a loan.
Sometimes a credit card isn’t best for making purchases or saving money but for demonstrating responsible credit usage to potential future lenders—important if you’ll need a loan in the immediate future or simply want to improve your credit score to qualify for lower APRs and better repayment terms down the road.
Secured cards and store cards are some of the easiest cards to get approved for (though it is possible to find credit cards for bad credit that have rewards). They’re one of the most reliable places to start your credit rebuilding journey.
Heads up: The purchasing power of either type of card will be pretty limited. Don’t expect a store card or secured card to boost your credit score by improving your total available credit. Instead, the best way to improve your credit is by paying the monthly balance in full every month.
There’s no shortcut to rebuilding your credit. After demonstrating responsible card usage you could get upgraded to a better card or an increased credit limit. This makes secured cards a bit more practical and also means that you’re on the right track.
How to choose the best credit card for your situation
Figuring out the best type of credit card for you and your debt strategy will depend on three main factors:
- Credit score
- Ability to make monthly payments (financial stability)
- Immediate and intermediate financial goals
Your credit score will ultimately determine which credit cards you might qualify for and thus, which strategies you can use. Want to give yourself time to pay off a large, one-time purchase with a 0% APR card?
If you have a credit score of 500, you probably won’t be eligible. You’ll need to find another route that’s both strategic and accessible to you.
Ability to make payments
Understanding your payment style is important when determining if one credit card might save you money in the long run. Are you planning on paying off the entire balance by the end of the promotional period or do you need long-term help making your credit card payments more affordable?
If you are someone who sometimes carries a balance, stay away from rewards cards. Those high interest rates will eat up any rewards you’d earn. If there’s even a small chance you might not be able to make a minimum payment on time, stay away. Even introductory 0% interest offers can quickly backfire and end up costing you more than they saved you. The key is to be realistic about your financial situation and plan for the worst-case scenario.
Financial goals & needs
Lastly, make sure to consider how a credit card might affect your financial goals. Opening a credit card will result in a hard inquiry and lower your average age of credit. Both of which could potentially lower your credit score.
Say you need to buy a car in the next few months and will need a loan. A lower credit score could result in a higher interest rate. As such, opening a new credit card might cost you money in the long run. On the other hand, if you’re overwhelmed with interest charges, preventing debt today could be more valuable than saving money in the future.
No matter which types of credit cards you have, Debt.com can help you find credit card debt relief.
Article last modified on May 19, 2023. Published by Debt.com, LLC