Types Of Credit Cards: Which Is Right For You?
Depending on your perspective, there are as few as three to as many as 1,000+ different types of credit cards. More specifically, the credit card market is segmented in a variety of different ways based on user type, underwriting qualifications, card terms, and special features – creating a multitude of potential combinations, not to mention a great deal of corresponding consumer confusion.
Given the sheer number of available options and the importance of finding a product that meets your individual needs, internalizing the similarities and differences between card types is an important prerequisite to any credit card search. The information below, coupled with our guidelines for choosing a new credit card, should give you all the ammunition you need to make an informed and successful selection.
Credit cards are essentially made to order. In other words, each offer is constructed using a building block approach – starting with the type of user, progressing to formulation of pricing and terms based on user underwriting qualifications, and ending with product development based on the target user’s particular needs. The result is a product that is not only targeted to a specific type of person and manner of use, but that will also enable the issuer to turn a profit.
In the most general sense, there are three main types of credit cards: those intended for use by students, small business owners, and the broader consumer population. These card types are fundamentally the same as far as overall appearance and functionality are concerned, yet have a few key differences when it comes to product terms, approval criteria, and even consumer protections that make them uniquely positioned to meet the needs of their respective target audiences.
General Consumer: What most people consider “normal credit cards,” general-consumer cards comprise the largest segment of the market in terms of the total number of offers available. Their overall value varies widely as well, based on issuer, card network, credit standing requirements, and a number of other factors. The CARD Act applies to general-consumer credit cards, which means users are eligible for all available rights and consumer protections.
Student Credit Cards: Credit card companies consider students to be a unique group because while their income is limited in the short term, their advanced level of education gives them above-average earning potential and their age correlates to years and years of future financial needs (i.e. a lot of revenue for financial institutions). As a result, students are typically able to garner more attractive credit card offers than their experience and financial circumstances would ordinarily merit. Student credit card users are eligible for all consumer protections.
Business Credit Cards: The small business community has unique financial needs and therefore merits a unique type of credit card. Business credit cards tend to offer higher credit lines than their general-consumer and student counterparts in addition to special expense tracking features, the ability to customize spending limits for a number of different employee authorized users, and rewards targeted to common company expenses like office supplies and telecommunications services. In order to get a business credit card, you must be the owner or principal of the business AND be able to provide a Tax ID Number (TIN) or Employer ID Number (EIN), along with your personal Social Security Number (SSN). As you might expect, the need to provide your personal SSN is indicative of the fact that you will be held personally liable for business credit card debt.
Small business credit cards are not covered by the CARD Act, which means users are not eligible for a number of important consumer protections, including the rule against arbitrary interest rate increases. However, certain issuers have voluntarily extended key parts of the CARD Act to their small business customers, and you can find a breakdown of their policies in WalletHub’s latest Small Business Credit Card Study.
The credit card business is all about evaluating and minimizing risks in order to ultimately maximize profits. Credit card companies are businesses, not nonprofits, after all.
- Credit History: There’s a reason why credit card companies “pull” your credit reports after you submit a credit card application: they want to evaluate the way in which you’ve used credit in the past, as that is the best determinant of future performance. Credit scores, as you may already know, are based on the information contained in these reports, and we are all labeled as having “excellent,” “good,” “fair,” “limited,” or “bad” credit depending on the nature of that data. Likewise, there are credit cards for people with excellent, good, fair, limited, and bad credit – with those who have excellent credit obviously getting the best deals.
- Income & Assets: Credit card companies are required by law to determine whether an applicant will be able to make at least the minimum monthly payments necessary to stay current on a new line of credit before granting account approval. Evaluating each applicant’s income and assets is part of making that determination.
- Debts & Liabilities: Since only considering one’s income and assets would paint a deceiving picture of their ability to pay, issuers must also take into account how much of an applicant’s money is already spoken for in light of other debt obligations. This information, coupled with an applicant’s income and assets, constitutes their disposable income and has a direct impact on the credit line they ultimately get approved for.
Altogether, the aforementioned three factors comprise your overall “credit worthiness” and dictate which types of cards you can get approved for.
A credit card’s specific terms and features are what gives it character and sets it apart from other products vying for the business of a particular demographic.
Rewards Structure: Credit cards offer spending-based rewards in terms of cash back, points, and miles. Some cards offer the same per-dollar “earning rate” across all purchase types, while others provide extra rewards in certain specific categories, such as gas, groceries, or travel. In addition, it’s common for cards to offer initial rewards “bonuses,” whereby the user is awarded a lump-sum allotment of rewards after their first purchase or as a result of meeting an initial spending requirement.
- Recommendation: Gravitate toward cash back rewards with lucrative earning rates in your biggest everyday expense categories, while periodically supplementing your earning power with an attractive initial bonus deal.
APR Structure: All credit cards charge interest. And if you don’t pay off your full balance at the end of each billing period or you make the unwise decision to do a cash advance, you’re going to get hit.
More specifically, credit cards generally have three different types of interest rates that are relevant when shopping for a credit card offer: an introductory rate for balance transfers, an intro rate for new purchases, and a regular APR. Sometimes they’re the same. Sometimes they’re not.
- Recommendation: You only need to concern yourself with a credit card’s APR(s) if you wish to reduce the cost of existing debt via balance transfer, you don’t pay in full at least two months out of the year, or you are planning a big ticket purchase that will take a few months to pay off. In any case, use of a credit card calculator is wise, as it will help you not only find the card that saves you the most, but also develop a strategic payoff plan. We strongly advise against using a credit card like a debit card (i.e. doing a cash advance) due to the prodigious cost.
Fee Structure: Like most financial products, credit cards are known to charge a number of different fees, ranging from annual membership fees and balance transfer fees to foreign transaction fees and cash advance fees.
- Recommendation: In most cases, a credit card’s membership fee is the only fee you’ll need to concern yourself with. And in most cases, your objective should be to minimize what you pay. The exception would be if you were able to get a rate or rewards deal lucrative enough to exceed the competition’s value, even with an annual fee considered. Only consider peripheral fees if you plan on making the type of transaction with which they’re associated (e.g. balance transfer fees and balance transfers).
Credit cards are further specialized based on certain unique characteristics designed to meet consumer needs, encourage spending, limit issuer risk, and solidify corporate relationships.
- Secured Cards: Secured cards often represent the best credit card option for people with bad, limited, or no credit history. They are practically identical to general-purpose credit cards, with the sole exception being that a security deposit is required to open a secured credit card. This deposit is fully refundable and will be returned to you upon closing your account with no outstanding balance. You can fund this deposit in multiple ways, including via checking account, money order or cash (in the event that the bank offering the secured card has a branch in your area). Given that the security deposit typically serves as a secured card’s credit line, most issuers offer guaranteed approval, as there is no threat of a consumer not paying back what he owes.
- Organizational Affiliation: Co-branded and affinity credit cards are linked to particular companies, organizations, and groups – ranging from professional sports franchises and travel providers to universities and professional organizations. Such relationships are designed to pique the interest of related consumer segments as well as reward users for their organizational loyalty.
- Merchant Affiliation: Store credit cards are directly linked to particular retail chains and can only be used at their stores. For example, the Target REDcard will only work at Target locations. Store cards tend to offer unique rewards at the retailers with which they’re affiliated as well as more lenient underwriting requirements than the general card population since they are designed to encourage added store spending among as many customers as possible.
- No Pre-Set Spending Limit: Most types of credit cards have fairly stable spending limits / credit lines that only change based on unique economic circumstances and changes in user performance. Most cards also clearly convey how much you are able to spend. With No Pre-Set Spending Limit (NPSL) credit cards, however, your spending limit will likely be a mystery and may change on a monthly basis. American Express charge cards, World MasterCard credit cards, and Visa Signature credit cards commonly have this feature.
- Charge Cards: Charge cards are identical to general credit cards, except that you must pay your total balance in full every month.
At the end of the day, there are a variety of different factors that dictate which types of credit cards we can garner approval for. That, however, doesn’t mean that choosing a credit card will be simple. You’ll still have a broad selection of offers from which to pick, and your ultimate choice will have a significant effect on your ability to minimize the cost of everyday money management. It’s therefore important that you become self-aware about your personal credit card needs, and gradually refine your options – starting with broad user characteristics and moving to specific terms and features – in order to find the right type of credit card for you.