Credit cards are exceptionally convenient, providing you with the opportunity to make cashless transactions and borrow funds from your card issuer for more substantial purchases you couldn’t otherwise make.
They can be used for everyday spending on groceries, gas, utility bills. But, they also give you access to more expensive items such as jewelry, gadgets and appliances, travels, and more – things you couldn’t afford with your immediately available funds.
While these are welcomed perks, the most significant benefit is that credit cards enable you to build up your credit history and improve your creditworthiness.
With a good credit history, you’ll find it easier to get approved for other types of loans such as car or mortgage loans, you can improve your chances of finding a suitable apartment to rent, and you can even find a job more easily.
Of course, it can work the other way around as well if you have a poor credit history.
Don’t forget that credit cards are loans! While you can use them to afford certain purchases and transactions immediately, you’ll still need to pay that money back, often with added interest. Not paying off your credit card balance will severely affect your finances and credit history.
Types of Credit Cards You Can Use
There’s a wide variety of unique credit cards you can get from banks and credit unions. Each card is used for different purposes, and each comes with perks and features that are entirely dependent on the card issuer.
Here’s a brief overview of the most popular types of credit cards.
Balance Transfer Credit Cards
Balance transfer cards are great for consolidating debt or reducing interest rates on your outstanding balance. They enable you to transfer your debt from one credit card to another from a different issuer that offers better terms, conditions, rates, and fees.
Keep in mind that balance transfer cards offer lower interest, but only for a limited time, usually 6 to 18 months. After this promotional period ends, you’ll have to pay regular rates.
Standard Credit Cards
Standard cards come with no bells and whistles. They’re simple, offering average rates and fees and few rewards and bonuses (if any). They enable you to make everyday purchases that you pay off by the end of the billing cycle.
Rewards Credit Cards
Rewards credit cards are the most valuable. They come with perks such as cash-back on purchases, travel insurance, gift points, discounts, and more. You need to have a good or excellent credit score to be eligible for them.
Student Credit Cards
As their name implies, these cards are designed for college students who are just starting to build their credit. They don’t have an abundance of features, but they’re convenient and will help you establish your credit history.
Subprime Credit Cards
Subprime credit cards are for those who have a poor credit rating and cannot qualify for more valuable cards.
They’re often secured, meaning you’ll need to make a deposit to use them. They come with high fees and few rewards and bonuses as they’re primarily designed to improve your credit rating.
Shopping Credit Cards
Shopping credit cards have limited applications and can only be used for buying goods or services from the selected shops and brands. Unlike regular credit cards that you get from banks and credit unions, these cards are issued by the brand/store that accepts them.
We can categorize cards based on the specific features they come with as well. Some of the more popular card subcategories are as follows:
- Low-interest Credit Cards
- No Annual Fees Credit Cards
- No Foreign Transaction Credit Cards
- Guaranteed Approval Credit Cards
- Credit Reporting Cards
- And more
Each card comes with pros and cons, so it’s essential to consider all your options before applying.
Different credit cards are used for different purposes. When choosing the card for you, examine your spending habits and consider what you’ll be using the card for, and then make a decision. Frequent travellers can benefit from no foreign transaction fees credit card, and shoppers could use a shopping or rewards credit cards. In contrast, credit reporting cards are excellent for those with poor/limited credit.
Importance of Your Credit Score
Your credit score is a crucial factor in determining whether you’re eligible for a specific credit card. The reason for this is simple – it’s a sign of your creditworthiness. Issuers like banks and credit unions use your score to determine how risky it is for them to give you a card.
Credit cards are loans. When you use them, you’re borrowing money from your bank, and the bank has no guarantee that you’ll pay back that debt since there’s no collateral (which is one of the reasons you’ll encounter so many different fees and rates).
The best way for issuers to gauge your risk level and see whether you’ll pay them back is by looking at your previous borrowing behaviour – your credit score. If you pay all of your debts in time, you’ll have a higher credit score and be seen as a less risky candidate. If you borrow from banks and lenders but often fall back on your debts, you’ll be seen as riskier candidates. Your application has a higher chance of being denied, and you’ll likely be hit with higher rates and fees.
Many factors will impact your credit score, including account age, credit utilization ratio, payment history, new credit, and credit mix. Keep a close eye on all of this if you want to improve your score.
Common Credit Card Features
Whether it’s a Mastercard, Visa, or some other network, each card has unique features determined by your card issuer (bank or credit union). Here’s a quick overview of some of the most common features you’ll encounter.
The credit limit is the maximum amount you’re allowed to borrow with your credit card. In most instances, you will not be able to spend more than your limit, although there are certain exceptions. If you overstep your limit, you will be hit with high-interest rates, so be careful.
Also, keep in mind your credit utilization ratio. As a general rule of thumb, you shouldn’t use more than 30% of your credit limit if you want to keep your credit score up.
Annual Percentage Rate (APR) is an interest charge on using your credit card. Some issuers offer promotional 0% APR in the first year of using a card. After the year’s up, you’ll be paying wither fixed or variable APR.
Credit Card Grace Period
Most issuers will offer a grace period on new purchases to your credit card, where they won’t apply interest charges until the end of the billing cycle. If you pay off the new acquisition by the due date, you won’t pay interest.
Cash advances and cash-like transactions usually don’t have a grace period, and you’ll be accumulating interest from the day of the purchase.
Fees You Can Encounter
Credit cards come with numerous rates and expenses, including, but not limited to:
- Annual fee
- Monthly maintenance fee
- Late payment fee
- Overdraft fee
- Cash advance fee
- Foreign transaction fee
- Returned payment fee
- Balance transfer fee
Rewards and Benefits
Many credit cards come with valuable rewards and benefits which are determined by your issuer. Cash-back rewards are typically the most valuable ones as they allow you to receive a small percent of your money back on some purchases.
Additional benefits can include:
- Purchase protection
- Airport lounge access
- Extended warranty
- Free Wi-Fi access
- And more
The Bottom Line
Credit cards are an essential addition to your wallet, but they need to be handled with care. While they can help you improve your financial health, they can also be detrimental to it. So, use them responsibly, pay off your balance on time, and enjoy the perks that they can provide.