You would consider replacing your cash with credit cards for many reasons. Some users find it easier to carry plastic instead of paper. Others prefer the speed of credit card transactions. Whatever your reasons might be, there is a lot you need to learn and understand about credit card offers. This is everything you need to know before you search and apply for your new credit card.

Credit Cards: Definitions and Common Uses

A credit card is a plastic card used as a payment method. The user, also known as a cardholder, gets a credit card from a card issuer, usually a bank. Credit cards differ from similar payment methods, such as debit cards, because they allow people to borrow funds from banks.

The two main uses of credit cards are:

  • 1. Paying for goods and services without any cash.
  • 2. Borrowing funds in the form of a cash advance.

With a credit card, you pay for goods and services by borrowing funds from your card issuer. You can think of it as getting a short-term loan – the issuer pays for your purchase at the point of sale, and then you pay that amount back to the issuer, plus interest and any additional agreed-upon fees.

A credit card is among the most popular payment methods for buying consumer goods and services. Paying with a credit card instead of cash is incredibly convenient if you don’t have any money or don’t like using cash for your transactions. It’s also beneficial in terms of tracking and security.

Alternatively, you can use a credit card to borrow funds from your card issuer as a cash advance. Most card issuers grant cardholders a line of credit (LOC), enabling them to do that. Your credit card will probably have a pre-set cash borrowing limit depending on your credit rating.

What are the Benefits of Credit Cards?

The benefits of credit card use range from the aforementioned convenience and security to special rewards. Your credit card can help you build or improve your credit score, provide you with different types of insurance, unlock discounts for airline tickets, earn significant bonuses, and so much more. When you start using a credit card, you can expect the following:

  • Signup bonuses can be worth anywhere from $50 to $250.
  • You can redeem bonus points for gift cards (Explained) or other rewards.
  • Frequent-flyer miles, usually one mile per dollar or two dollars spent.
  • More excellent protection from credit card frauds and botched paid services.
  • The grace period allows you to postpone your payments.
  • Different types of insurance, usually travel and rental car insurance.
  • Universal acceptance means no loss on currency conversion.
  • Credit score building, which helps you with loans and job searches.

What are the Credit Card Types?

Different card issuers offer many kinds of credit cards. You shouldn’t let this confuse you. These cards are usually custom-tailored to fit specific cardholders’ needs but fall under the same ten categories. These are the 10 most commonly used types of credit cards:

Standard “Plain-Vanilla” Credit Cards

Standard credit cards are easy to understand and offer no bonus points or rewards. Once you’ve used up your credit on purchases, you pay your credit card bill and receive more credit on your card.

Balance Transfer Credit Cards

Balance transfer cards allow you to transfer balances at a more affordable rate than other types of credit cards that offer the same ability. They often have time-limited, low introductory rates. See Balance Transfer Credit Card Offers.

Rewards Credit Cards

With rewards credit cards, you collect points on purchases that you can later exchange for cash (cashback rewards credit cards), gifts (points rewards credit card), or travel-related discounts. See Reward credit card Offers.

Student Credit Cards

As their name suggests, student credit cards are designed for young adults without any credit score or history. Most card issuers require applicants to be enrolled at an accredited four-year university.

Charge Cards

Because charge cards don’t have any pre-set spending limit, they require a strong credit history. To use this type of card, you must also pay your balances in full at the end of every month.

Secured Credit Cards

Secured credit cards are a good option for people who have a poor credit score or don’t have any credit history at all. They are obtained with a security deposit and a credit limit equal to it. See Secured Card Offers (Explained)

Subprime Credit Cards

If your credit score is so bad that you can’t apply for a secured credit card, your only option is a subprime credit card. However, you should expect high interest rates and confusing terms.

Prepaid Cards

Prepaid cards are similar to debit cards in that a cardholder doesn’t borrow money from the issuer but withdraws funds from their own deposit instead. The amount you load is the amount you spend. See Prepaid & Debit Cards

Limited Purpose Cards

Unlike other types of cards, limited purpose cards are not universally accepted. They come with a minimum payment and finance charge and can be used to buy designated goods/services. See Shopping & Merchandise Cards (Explained)

Business Credit Cards

Business credit cards are aimed at business owners who want to separate their private and professional transactions. Nevertheless, your private credit history will still be considered. See Business Credit Card Offers.

Other Not-So-Popular Types of Credit Cards

Credit Types by Applicants’ Credit Score

Interest Rates, Fees, & Other Expenses of Credit Card Use

Regardless of its specific type, every credit card comes with a particular interest rate, credit card fees, and other expenses. Understanding how card issuers calculate these fees will help you choose the best credit card for your needs and better manage your card payments and costs.

Credit Card Interest Rates

One of the key features of your card is the interest rate, which is calculated and expressed as an annual percentage rate (APR). Depending on the card issuer and the credit card type, there are two main types of interest rates – fixed and variable – in addition to other different types of APRs.

Unlike fixed interest rates, which can only change in certain circumstances, variable interest rates will always vary depending on different interest rates. In addition to that, your card can also have different APRs for your other balances, as well as a periodic rate for less than a year.

Common Credit Card Fees

If you look at your card agreement, you’ll see that your issuer takes several additional fees here and there. Most of them you can avoid, like cash advance fees, finance charges, or expedited payment fees. Others, like annual and balance transfer fees, usually can’t be avoided.

The fees and additional expenses depend solely on the card issuer, so you should take your time and compare offers before signing an agreement. For example, some issuers don’t charge an annual fee, while others charge their cardholders anywhere between $20 and $500.

Using Multiple Credit Cards

Carrying multiple cards makes sense only if you use them for bonus points and rewards with different purchases. For instance, you can combine a frequent-flyer mile card with a travel rewards card and save money on family vacations with cheaper airfare and hotel stays. Otherwise, you’d only be dealing with too many balances and bills. In addition to that, holding multiple credit cards can be bad for your credit score.

If you decide to apply for multiple credit card offers anyway, you should at least pick them carefully. Choose cards without annual fees, and don’t carry a balance. Also, do your best to pay your credit card bills on time, or you’ll have to deal with the additional expense of late fees.

Protecting Yourself from Becoming a Victim of Credit Card Fraud

There are many threats, online and offline alike, that endanger the security of your credit cards. One of the greatest benefits of credit cards is that your money is not directly compromised, but that still doesn’t mean you cannot fall victim to credit card fraud. Here’s how to stay protected:

  • Keep your credit cards safe from thieves and criminals.
  • Generate strong passwords and don’t write them down.
  • Shred every document with your credit card number.
  • Never sign credit card receipts that are blank or blurry.
  • Give your credit card information only to trusted people.
  • Learn to avoid online scams such as social engineering.
  • Go through your credit card billing statements each month.
  • If your credit card gets lost or stolen, report it immediately.

Frequently Asked Questions