Types of Credit Cards: Understanding the Differences

Standard credit cards are the most traditional type of credit card. Understanding how they work will give you a good foundation for understanding the other different types of credit cards, such as rewards and balance transfer credit cards, which essentially operate the same way but offer additional features.

Standard credit cards allow you to spend up to a pre-defined credit limit; once you hit that limit, you must pay off some of the balance before spending any more. Your credit purchases are pooled together onto a credit card statement covering a specific period, typically a month. If you pay the statement balance on or before the due date—usually almost another month—you are not charged interest. You must make at least a minimum monthly payment of from 1% to 3% of the statement balance, depending on the card issuer; otherwise you may face penalty charges. The balance that you carry over every month—on which you will pay interest—is known as “revolving credit.” Card issuers often charge an annual and/or monthly fee, though “no annual fee credit cards” also are available.

The interest rate on a standard credit card is called an annual percentage rate (APR). It typically ranges from 15% to 25%, although some cards offer an introductory 0% APR for the first 12 to 18 months. Some types of credit cards, known as subprime cards, may have even higher APRs as well as additional charges, and are typically marketed to people who lack good credit.
 

With rewards credit cards, you earn financial rewards as you spend. There are three main types of reward cards:
 

• General rewards points. You earn points based on how much you spend. You can use these points to buy a range of goods and services, usually through the card issuer’s partner companies.
  
  
• Travel rewards credit cards. You earn points towards free flights, hotel stays or other perks by spending through your card.
  
  
• Cash back credit cards. You typically receive rewards, redeemable for dollars, equal to a small percentage of your spending. The rewards accumulate on your card account until you redeem them, usually for a statement credit.

There are more options for rewards credit cards than any other type of credit card. For example, travel credit cards can break down further into airline miles and hotel credit cards, any of which may also be a “no-foreign-exchange-fee” credit card. Conversely, some rewards credit cards offer multiple types of reward. However, apart from the fact that they offer rewards, these cards mostly operate in the same way as standard credit cards.
 

Most credit cards let you transfer balances from other cards. However, balance transfer cards usually offer a low introductory interest rate specifically for that purpose. The interest rate can be as low as zero, but it typically only operates for a short period of time (as little as six months), after which it reverts to a higher standard interest rate. The introductory rate may be cancelled if you miss a minimum payment or pay late. You typically need a good credit score to qualify for a balance transfer card—and even better credit scores to get a 0% balance transfer card.

Charge cards work differently from standard credit cards. There’s often no pre-set spending limit, but in general you must pay off the balance in full every month. There’s no interest charge if you pay on time, but late payments may incur substantial fees. However, some charge cards allow you to pay off part of the balance, with interest, over a longer period. Charge card providers usually charge an annual fee. Typically, you need a good to excellent credit score to qualify for a charge card.
 

If you’re a young person looking for your first card, you may find it hard to qualify for most types of credit card because you haven’t accumulated much credit history. However, if you’re enrolled in an accredited four-year university course, you may qualify for a student credit card. Several types of student credit cards are available, including rewards cards, cash back cards, and cards with low-interest introductory periods.

APRs on student cards are similar to those on standard credit cards. It’s worth looking for cards with low APRs and zero fees.

If you are running a small business, you might consider paying for business expenses with a business card. Some business cards are charge cards that have no credit limit or a very high limit but must be paid in full every month. Some charge cards allow part of the balance to revolve, but you’ll need to pay interest on it. Other business cards are credit cards that have a lower spending limit but allow the balances to be paid off over a longer period.

Business credit and charge cards often have extensive rewards programs geared towards the needs of businesses and their owners.
 

If you don’t have a good credit score, you may not qualify for a standard credit card or a rewards card. As an alternative, you could consider a secured credit card.

To obtain a secured credit card, you need to make a substantial security deposit, typically equivalent to the credit limit on the card. You can then use the card like any standard credit card. Secured cards typically have APRs that are relatively high, though lower than many unsecured cards. They don’t usually offer rewards, though some offer cash back on certain types of purchases such as groceries and gas. Some cards can be upgraded to a standard card after a period of time, provided that you haven’t missed payments or paid late.
 

If you often shop in a particular store or retail chain, you may find that a credit card issued by the store works for you. Many major retailers issue this limited-purpose type of credit card, which can only be used to buy goods and services from a specific retailer. Some major gas stations also issue limited-purpose credit cards that only can be used to buy their gas. Some of these limited-purpose cards provide discounts or rewards points. In other respects, these limited-purpose cards usually operate like standard credit cards.

Prepaid cards are not a true type of credit card, since they must be loaded with cash before they can be used. Once you have loaded your card with cash, you can use it for purchases until the balance is zero, at which point you’ll need to put more cash on the card before you can use it again. There may be a charge for reloading the card. Some prepaid cards, such as gift cards, can’t be reloaded—you have to buy a new card. Since prepaid cards are not a type of credit card, they can’t help build your credit score.