I’m not going to lie, I used to be terrified of credit cards.
Growing up around Depression Era grandparents and having a mom in banking gave me a healthy fear of plastic, and for a good reason. A huge number of Americans have credit card debt. And not just some debt, but A LOT of debt.
In 2016, over $1 trillion in credit card debt had been racked up by Americans, with the average household owing $8,377.
That’s a lot of interest being paid to credit card companies.
But despite the temptation to run up your balance, there are ways to put your line of credit to good use. In fact, credit cards can be an extremely useful financial tool if you know how to use them.
Aside from having a plethora of different kinds of cards with different benefits, credit cards are a great way to build your credit score and make you more appealing to lenders when you go to apply for a more substantial loan. Especially if you show you can be responsible with multiple lines of credit open.
Before we get to the different types of credit cards and how you can take advantage of their benefits, we need to get one thing straight.
Credit cards are only beneficial if you pay off the balance on them every month. If you are not able to pay the balance every month, DO NOT OPEN CREDIT CARDS!
I cannot emphasize this point enough. Credit cards have many benefits, but if you are paying interest every month, those benefits are rendered useless.
Forget the benefits, if you use your cards to buy things you wouldn’t normally buy and leave a large balance on them, you will likely get yourself into a bad financial situation with a lot of debt and limited ability to repay it. This, in turn, will hurt your credit score (making it harder to gain more credit and resulting in higher interest rates) and worst-case scenario, may result in loss of assets!
Moral of the story: only open credit cards if you are committed to paying them off every month, and only use credit cards for purchases you would normally be making with cash or a debit card.
Okay, now that we’ve gotten that straightened out, let’s get to the fun part.
There are many different types of credit cards with different benefits. Each individual card is unique in terms of its specific benefits, but all cards fall into a few general categories (and many belong to multiple categories). Which card (or cards) is best for you depends on your goals. Let’s take a look at the types of credit cards out there and see if any would work for you (remember that many cards will belong to several of these categories).
Different Types of Credit Cards
Standard credit cards, often called vanilla or plain vanilla cards, are the most basic of the types of credit cards, as they do not offer rewards and are pretty straightforward in their terms.
Basically, a set line of credit is extended and revolved as long as the debt is repaid periodically. A minimum monthly payment must be made by a deadline to avoid late penalties. Standard cards are available with most banks and card issuers.
A personal credit card is just what it sounds like: for personal use. Lenders look at your personal credit score in determining qualification, and these cards are generally used for personal expenses.
Business cards are generally used by small business owners and their employees for business expenses.
Not just anyone can obtain a business card (although almost any type of freelance or sole proprietorship enterprise can count), and any rewards associated with them are targeted toward business expenses.
Also, business cards are reported to a business credit reporting bureau, resulting in a business credit score. However, business cards can still affect your personal credit score if they are misused, so use caution.
Unsecured cards are what most people think of when they think of credit cards. These cards allow you to spend up to a set limit without putting up any form of collateral. You can borrow and spend up to your limit with periodic repayment. You typically need at least an okay credit score to be approved for unsecured cards.
Credit cards are a great way to build credit, but it may be difficult to get approved for credit cards if you have bad credit. In these situations, a secured credit card is a nice option.
Secured credit cards require collateral in the form of a cash deposit when you open the account. This deposit typically becomes your credit limit and reduces the risk to the company issuing the card. If you default on your payment, the card issuer can take the funds from the cash deposit.
Other than the required deposit, secured cards are just like regular unsecured cards in that they accrue interest and can be used anywhere.
Student cards are designed for individuals with a limited credit history (or no credit history). Many of these cards come with rewards, but generally, the applicant must be attending post-secondary school to be approved.
Rewards cards are my favorite type of credit card, as they offer rewards for every dollar spent on the card. There are a myriad of rewards available depending on the card, but my favorites are flexible rewards and travel rewards.
Some credit card issuers, like Chase (Ultimate Rewards) and American Express (American Express Membership Rewards), offer their own rewards systems, which can be redeemed through their portals, transferred to various partners, or used for cash back.
Other cards are co-branded with other companies, such as hotels and airlines. In this case, the rewards earned on these cards are transferred to the co-branded program (more on that below).
My favorite flexible rewards program is Chase Ultimate Rewards, which I’ve used both to redeem travel rewards through the portal as well as transferred to partner programs for redemptions. My favorite rewards credit card is the Chase Sapphire Preferred, which offers a pretty good sign-up bonus, rewards categories (to earn bonus points), and flexible Ultimate Rewards.
Cash-back cards offer rewards in the form of cash back on purchases. While I prefer rewards in the form of points that can be used for travel, Sebastian prefers cash back on his purchases.
Different cards offer different rates of cash back, but my two favorite cash-back cards are issued by Chase. They are the Chase Freedom and Chase Freedom Unlimited. While I like these cards because you can redeem the rewards for Chase Ultimate Rewards (when paired with Chase Sapphire Preferred or other annual fee Ultimate Rewards cards), you can also choose to redeem the rewards as cash back.
Chase Freedom has rotating 5% cash back categories (1% on everything else), while Chase Freedom Unlimited offers 1.5% cash back on all purchases. With these cards, you can get a good percentage of money back on purchases you’re making anyway, and with no annual fee.
Annual Fee Cards
As the name suggests, annual fee credit cards charge a fee every year to keep them.
While the annual fee is a turn-off for many, these cards often carry better benefits (travel credits, higher redemption rates, no foreign transaction fees, insurance, free nights, etc.) that make the fee worthwhile, especially if it is waived the first year (giving you an opportunity to try the card out for free).
The amount of the fee varies, from $49 a year with the IHG Rewards Club Select to $450 a year for premium cards such as the Chase Sapphire Reserve or the Citi Prestige, and even as high as $550 a year for the Platinum Card from American Express.
Again, annual fee card benefits tend to make up for the fee if fully utilized, but we tend to stick in the middle in terms of the annual fee for a healthy blend of benefits and costs (ranging from $69 to $99 a year).
No-annual Fee Cards
These cards offer many of the benefits of other credit cards without an annual fee. Depending on the card type (cash back, rewards, standard, co-branded, etc.), holders will reap the benefits without paying a fee to use the card.
However, the redemption rates and benefits are typically inferior to that of an annual fee card (limited transfer ability, foreign transaction fees, etc.). No-annual fee cards are perfect for those interested in earning some type of reward with more limited spending and who will not utilize the benefits of the annual fee cards.
Co-branded cards are the result of a partnership between the card issuer and another company. The most common co-branded cards are with hotels, airlines, and store brands. In fact, almost every hotel chain, airline, and major store brand have a co-branded card with one of the main card issuers (Chase, American Express, Barclaycard, Citi, etc.).
With hotel and airline co-branded cards, the cardholder is enrolled in the rewards program of the partner, and points/miles are compiled with that program. For example, Chase issues several co-branded cards with Southwest Airlines (my favorite airline), and so all spending on the card translates to points in Southwest’s Rapid Rewards program under the account of the cardholder.
One benefit of co-branded cards is that you can cancel the card without losing your points (once they have been transferred into the partner program).
Store brand cards are typically offered to customers to either get a percentage off when shopping at that store or to pay no interest for a specified number of months on larger purchases. Unless you shop at a specific store all the time and spend a lot of money, store brand cards are only really useful for making payments interest-free on large purchases (but make sure you pay it off before the no-interest period ends, or you WILL be charged interest for the entire time you’ve been paying on the balance).
Balance Transfer Cards
Balance transfer cards offer you the ability to transfer the balances on other high-interest-rate accounts to one with a lower interest rate. Typically, balance transfer cards offer a low introductory rate for a period of time (some as low as 0% APR), but then will usually increase the interest rate after the introductory period.
As a result, balance transfer cards are a good tool for paying off balances at a lower interest rate, but you should take care to pay off the card before the promotional period ends to save the most money.
Sign-up Bonus Cards
Most major card issuers and co-branded cards belong to this category, as offering a sign-up bonus is a good way to entice people into opening an account.
The concept is simple: the cardholder will earn a sign-up bonus after spending a specified amount within a certain period of time. For example, the Chase Sapphire Preferred currently offers a sign-up bonus of 50,000 Ultimate Rewards points when you spend $4,000 in the first three months after opening the account.
Rules for earning a sign-up bonus, as well as how often you can earn them, vary by card and issuer, but it is generally a good idea to keep the card for about a year before canceling to avoid the bonus being revoked (card issuers do not appreciate people opening accounts to earn the bonus and then closing them immediately).
Different Types of Credit Cards
There are a plethora of different types of credit cards to choose from, but the card (or cards) that is best for you will depend on your goals and what rewards interest you.
We suggest deciding what type of rewards you are interested in (airline, hotel, flexible, cash back, etc.), then deciding whether you are willing to pay an annual fee (not recommended if you will not be able to utilize the benefits). If you are new to credit cards, maybe start with a no-annual-fee card or a flexible rewards credit card until you get your feet wet.
Remember, do not open credit cards unless you are able to pay your balance in full every month (or close to it) to avoid paying interest, especially if you hope to utilize rewards. Carrying a balance will render mute the benefits of the different types of credit cards and give more money to card issuers (hint: they love accounts that carry balances, as interest is where they make their money!).
Ultimately, while credit cards carry a big risk for many of us, if you play your cards right (pun definitely intended!), you can reap some major benefits by making the cards work for you.