Types of credit cards: Differences and considerations for choosing one
6 min read
Credit cards are a convenient way to make a purchase now and pay later. Plus, they can help you build credit and provide perks, such as cash back or airline miles. We all love free stuff. (Access to airport lounges or free upgrades to first class? Yes please!) But there can also be downsides. Rewards cards may have high fees or interest rates, for example. And if you don’t pay your cards off each month, you could find yourself deep in credit card debt.
Whether you’re applying for your first card or you’re a seasoned swiper, take some time to research your options before signing up to help make a smart choice for your financial situation, goals, and lifestyle. Read on for tips on how to choose a credit card.
Different types of credit cards
As you’re shopping around for a new card, there are eight common types of credit cards to get to know. We’ve listed them by their type but note that some features may overlap.
Unsecured cards
Most credit cards are unsecured. To open one, you don’t need to put down a deposit or provide any other collateral. Instead, credit card companies will rely on your credit history and score to help them decide whether to approve a new customer. Individuals with higher scores have an easier time getting approved for an unsecured credit card and may qualify for lower interest rates.
Secured credit cards
Secured credit cards can be a good option if you have no credit or have poor credit and you’re having trouble qualifying for a new unsecured card. Secured cards require a refundable security deposit, which reduces risk for the card issuer, making them more likely to extend credit. By making on-time payments with your secured card, you can gradually build or rebuild your credit score. In doing so, you’ll be expanding your future financial opportunities.
Learn more about the differences between secured vs. unsecured credit cards. We should note it’s also possible to build credit without a credit card.
Rewards credit cards
You can make the most of everyday spending with rewards credit cards that let you earn points, miles, or cash back on your purchases. Several types of credit cards fall under the rewards card umbrella, including cash back cards, travel credit cards, and retail cards.
Cash back credit cards
What is cash back on a credit card? A cash back credit card offers you the chance to earn back a percentage of your purchases as cash rewards. Depending on the issuer program, you can save the money you earn to use toward your other financial goals or apply it to your credit card balance.
Travel credit cards
Got a case of wanderlust and wondering what a travel credit card can do for you? These cards can be a great fit for frequent travelers and typically offer travel rewards and perks like airline miles, hotel discounts, or travel insurance. Users rack up rewards on travel and everyday purchases. While you’re on the road, some travel credit cards offer additional benefits, such as no foreign transaction fees.
Retail or gas credit cards
Do you frequently shop at a particular store? If so, a retail card might be appealing. They can offer discounts, rewards, or financing options for purchases at a store or gas station.
Student credit cards
Student credit cards are designed for students attending college who have limited credit histories. They typically have lower credit limits than traditional cards and offer an opportunity to build credit. After graduation, students can often transfer their student credit card to a standard credit card.
Business credit cards
If you’re a small business owner or working as a freelancer, a business card can help you manage your finances while you get your hustle on. Benefits include expense tracking, separate business accounts, and rewards tailored to business-related purchases.
How to choose a credit card
With so many types of credit cards available, how can you pick the one that’s best for you? Your decision will be based on your circumstances since everyone’s financial situation is unique.
Here are a few factors to keep in mind:
- Your credit score. A good credit score—a FICO score that’s 670 or higher—will help you qualify for a credit card with a lower interest rate. Lower credit scores may make it tough to qualify for a card or make interest too expensive for your budget. If you have a poor credit score, you may opt for a secured credit card to help you build credit. You can then apply for an unsecured card later on.
- Your lifestyle and goals. Match your card to your financial goals and lifestyle. If you’re an avid traveler, a small business owner, or a student, look for a card that aligns to your interests and needs.
- Credit card interest rates. Credit card interest rates can reach more than 20%. If you pay off your card each month, you may avoid interest payments. Carry a balance month to month, and you’ll owe interest. And, adding to the balance each month can make it tougher to pay off. If you plan to carry a balance, look for credit cards with the lowest interest rates to minimize costs.
- Late fees and penalties. If you don’t keep up with credit card payments, some companies charge hefty fees and/or penalties. Look for credit cards with low or no fees.
Whichever credit card type you choose, do your best to avoid spending beyond your means. While your card has a credit limit, you’ll want to keep your balance way lower, so you can pay it off each month. Making timely payments will maximize the benefits of a credit card without increasing your debt.
Keeping tabs on your credit: How Spruce can help
Staying on top of your credit score is an important step to building credit. Whether you’re renting an apartment, applying for a car loan, or opening a new credit card, your credit score helps financial institutions determine what options are available to you.
Luckily, Spruce makes it straightforward to monitor your credit report and dispute any errors. You can view your FICO score, any time in the Spruce app and get monthly updates and additional information about the factors that could impact your score.
Work toward your financial goals with Spruce
If you’re trying to understand your credit score, reach your savings goals, or just be more confident with money, the Spruce mobile banking app has you covered with a wealth of tools at your fingertips.
With features like saving goals that let you easily save up for purchases vs. using credit, fee free overdraft protection up to $20, and the Watchlist budget tracker, you can continuously make strides with Spruce to boost your money skills.
Get started with Spruce today!
This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.