If you’ve decided that you’d like a credit card, but don’t quite know where to start, then you’re in the right place.
We’ve listed six different types of credit cards, and explained how each of them works. From reward cards, to balance transfer cards, we take a look at them all, so you can choose which is best for you!
What’s A Credit Card & How Do They Work?
A credit card is a plastic card that gives you access to “credit”. You can get a credit card through your bank, building society or other type of credit lender.
With a credit card, you borrow money from a card provider instead of using money from your own personal account. A credit card is therefore a type of loan, and is one of the most popular ways of borrowing money.
When you’re issued a credit card, you agree to a set amount of credit. This can be anything from a few hundred pounds/ dollars to thousands. This set amount is often called a credit limit.
Each month you can spend up to your credit limit. You’ll receive a credit card statement at the end of the month, which lets you know how much money you owe. You can either repay the full amount, or some of the amount, as long as you meet the monthly minimum repayment.
If you can repay the money in full, you will not have to pay any interest on the amount borrowed. It is therefore highly advised that each month you aim to repay as much as you can.
If you are not able to repay the full amount, you’ll be charged interest on the remaining balance. This interest rate will depend on which type of credit card you’ve chosen. As well as factors like your credit history and personal financial circumstances.
Pros Of Owning A Credit Card
When a credit card is used properly, it can be a great way to spread the cost of big purchases.
If you don’t have access to enough money, a credit card gives you the option to buy now and pay back later.
Credit cards are also safer than most other cards because you’re protected for most purchases. If you buy something (e.g. flights) and the company goes bust, the credit card company is likely to recover the costs for you. This is because of Section 75 (part of the consumer credit act 1974) which says your credit card provider has joint responsibility for any breach of contract by a retailer. This means you can claim against your credit card company if you need to be refunded any money.
They’re also great to have in case of emergencies. If you don’t have huge amounts in savings, credit cards can be a useful way to access a sum of money. Ideal for when you receive an unexpected bill or your house needs immediate maintenance.
When used correctly, credit cards are also helpful when it comes to building your credit history. Lenders need proof that you are capable of borrowing money (and repaying it) so when used well, credit cards are proof of your trustworthiness. This helps when you then apply for larger loans, like mortgages.
Many credit cards also come with added rewards, like complimentary insurance or cashback.
So what are the different types of credit cards?
Types Of Credit Cards
A rewards credit card gives you access to special benefits, like air miles, cashback, or store points. Every time you spend money on your rewards card you accumulate these benefits.
If you’re debt free and good at repaying your credit card bill in full each month, it can pay to own a reward card.
Use your reward card for everyday spending, and you may earn huge amounts in cash back/ bonuses each year.
There are various different types of reward cards, all with different benefits. If you’re a frequent traveller, getting a rewards card with Avios rewards might be most suited to you.
If you’re spending a lot of money in the supermarket, then you might want to consider looking at a supermarket reward card. Make sure you assess the benefits of the reward card. As well as the monetary value of the rewards points, to make the most out of the incentives.
If you miss any payments on a rewards card, these benefits can easily be taken away. You should therefore set up a direct debit each month to repay the full amount in time. By doing this you won’t miss any payments. You won’t end up paying any interest. And you won’t lose any of your rewards.
Credit Builder Cards:
If you have a poor borrowing history, getting a credit card can be tricky. Your best bet is to opt for a credit builder card. This can help you build up your credit history, and prove that you’re capable of responsibly borrowing money.
Credit builder cards are likely to come with high interest rates, but using them well can help you demonstrate your trustworthiness when it comes to borrowing.
The credit limit on these cards is often fairly low, as they’re aimed at people with less than ideal credit history. However, they also have lower eligibility criteria for applicants, (so you’re more likely to be accepted, even if you don’t have a great financial history).
If you can demonstrate good borrowing, some credit builder cards might lower their APR or even increase your credit limit. This is called a “low and grow” approach. I.e your limit starts off low and grows as you show you can properly manage your money.
If you take out a credit-builder card and then can’t repay the amount in full, you’ll be subject to extremely high-interest rates. (Anywhere between 25% and 65%). It is therefore really important that you consider whether getting a credit card is the right option for you.
0% Balance Transfer Cards:
If you have debt on an existing credit card, you could look to open a 0% balance transfer credit card.
This works by moving the debt from one credit card to another card with no interest rates.
Moving to a card with 0% interest rates, means you can pay off your balance without being charged extra interest fees. Any money you pay towards your debt is then used to cover debt-repayments, instead of fees.
Once the 0% interest deal ends, you can either switch to another 0% balance transfer fee. Or you can try to have already cleared the debt.
All balance transfer cards will charge a fee to transfer the balance from one card to another. This is usually about 3%, so you need to consider whether switching will save you money.
If you’re thinking about getting a balance transfer card, make sure you take into consideration the length of the deal. Your credit history can play a part in the length of your 0% deal. Getting 0% interest for as many months as possible is the best option.
Money Transfer Cards:
A money transfer card is similar to a balance transfer card, except you transfer money from your credit card to your current account. Doing this is basically the same as giving yourself an interest free loan.
If you want to pay for an item, but credit cards are not accepted, then a money transfer card is your best bet. Most money transfer credit cards offer 0% interest, so they are useful if you need to pay off your overdraft, payday loan, or store credit.
As with balance transfer cards, money transfer cards also come with a fee. You’ll pay this fee upfront when moving money, and it’s normally between 2-4% of the total funds you’re transferring.
It’s important to still repay the minimum monthly installments. Else you’ll be charged late fees, or even have your 0% interest deal cancelled.
0% Purchase Cards:
Purchase cards, or 0% interest credit cards, can be used when you’re looking to purchase big ticket items.
Using a 0% interest credit card to shop, essentially means you can borrow money for free. Depending on the length of the deal, you can then repay the amount over a long period of time, with no added interest.
This can come in handy when you need to replace expensive household items, and don’t have enough money in a savings account. Buying a phone is another example of when a 0% interest credit card can save you money. If you don’t have enough money to buy a phone outright, use a 0% interest credit card to buy the phone and then pay it back in monthly installments. This method almost always works out cheaper than paying a monthly contract.
Although there aren’t any interest fees, it’s important to still make the monthly repayments. If you miss a payment, you run the risk of losing your 0% interest deal and may even face a missed payment fine.
The 0% interest rate also has a time limit. Make sure you aim to pay off the debt before the 0% deal runs out.
Travel Credit Cards:
Most credit cards will charge you a small fee if you use them when you’re abroad. At the time of writing this, the fees were between 3-5%, which is definitely not a cost you want to add onto an already expensive trip away.
With an overseas/ travel credit card you can use the card without worrying about extra charges. This also means you don’t have to worry about carrying cash around with you in unknown places.
Travel credit cards also work when you’re not travelling abroad. Use your travel card when paying for items online in a foreign currency and you’ll avoid any of the transaction fees.
If you’ve got a travel card and you’re planning on using it on your next holiday, make sure you always select the option to pay in local currency. This means your bank exchange at the wholesale exchange rate, which is usually more competitive than not paying in local currency.
To recap the benefits of having a travel card include; no foreign transaction fees, protected purchases, better exchange rates, and possibly rewards when you spend.
However, travel cards often come with higher APRs. If you do not pay off your balance each month you will have to pay interest charges. This could then ultimately cancel out any of the savings you made in the first place.
Cons Of Credit Cards
Now that we’ve gone over the different types of credit cards, it’s important to mention that credit cards can be costly if they are not used well.
Money from a credit card is not free money. And however tempting it may be, you must take care to not spend too much money.
If you are unable to repay the full amount at the end of the month, you’ll have to pay interest on the balance. The interest rates on credit cards are often quite high.
The impact that interest rates have on the total debt amount, means people often spiral into debt at alarming rates. Along with interest rates, you need to watch out for any additional fees. Fees can come in the form of missing payments, exceeding your credit limit, or taking cash from an ATM.
These things can then also impact your credit rating, making it harder to be accepted for future loans. That is why it is extremely important that you consider which type of credit card is most suitable for you.
We’ve just talked through six different types of credit cards. We hope this will help you understand which credit card is best for you and your current financial situation.
Emma is a money management app that connects all your bank accounts to track your monthly spending and subscriptions. Emma will help you visualise and take control of your finances. Make sure you aren’t overspending and show you practical steps to start budgeting effectively.
Find out the best way to navigate your first 10 days with Emma by reading this article: How To Use Emma