By Allan Halcrow | American Express Credit Intel Freelance Contributor
6 Min Read | November 06, 2019 in Cards
Living in a time when you can choose from more than 20 kinds of Triscuit® crackers, it should be no wonder that there’s an even greater variety of credit cards available. But while crackers are an easy concept to grasp, defining credit cards is harder. So, let’s define credit card (and other cards mistaken for credit cards), explore their variations, and consider the pros and cons of each. The more you know, the easier it will be to choose a card that helps meet your financial goals.
First, think of a credit card as defined not by its form but by its purpose: Credit cards provide you instant mini-loans to pay for goods and services. For that convenience, you typically pay interest on the amount you borrow and, often, miscellaneous fees.
That sounds straightforward, but lenders have developed seemingly infinite variations. For example, you can use general-purpose cards throughout a network of businesses that accept them but you can generally only use private-label (or co-branded) cards at the businesses that issue them; “secured” cards are designed to build (or rebuild) credit; and zero-interest balance transfer cards can save you money—if you read (and abide by) the fine print. 1
The aim is to match features to your goals.
Any credit card can help you build good credit if you consistently use only a small portion of your available credit and make on-time payments.2 But some cards are designed to help you build credit.
Secured credit cards are secured by cash: You make a security deposit to the bank ($200 is usually the minimum) and get a credit card with a limit equal to that deposit. You then use the card and make payments toward your balance to show that you are a responsible borrower.
You can also get a credit card as an authorized user. The owner of a credit card (typically a parent or spouse, but it could be anyone) grants you charging privileges on his or her account.
Borrow money for free? Well, yes—for a short time, and with limitations. Certain cards offer a zero percent introductory interest rate and some even have low interest after the introductory period. Depending on the card, that rate may apply to new purchases, to a balance you transfer from an existing card, or both.
Airlines promote cards that let you earn frequent flier miles for each dollar you spend. But there are many other rewards credit card providers that give back part of what you spend (one percent is common) or give you points that you can redeem for merchandise or experiences. And beyond the airline, points-generating travel and hotel credit cards also are popular.
Before you choose which credit card is right for you, consider two other options that many people think of as credit cards but that don’t meet the definition: charge cards and debit cards.
A charge card is similar to a credit card in that you can use it for purchases that you will pay for later. However, they’re not credit cards because you have to pay the full balance each month. Of course, as in most things these days there’s a bit of blur between them as charge card providers begin offering ways for customers to extend payback times.
Debit cards are not credit cards at all; they allow you to access electronic networks to use money in your checking account in real time.
Choosing the right credit card may never be as easy as choosing the right Triscuit®, but it doesn’t have to be as complicated as choosing the right cable package, either. Because the right combination of credit card features can directly support your financial goals—and poor choices can actually make your financial situation worse—it’s wise to define your goals, ask questions, and read the fine print.
1 “7 things you must know about credit cards,” Creditcards.com
2 “Using a Credit Card to Build Your Credit,” NerdWallet
3 “9 things to know about secured cards,” Creditcards.com
4 “Authorized users aren’t liable for card debt,” Creditcards.com
5 “Will Authorized User Status Help You Build Credit?” NerdWallet
6 “Three things you need to know about zero percent interest rate promotions,” Smartasset
7 “Charge cards vs credit cards – what’s the difference?” Credit Card Insider
8 “Credit Card vs. Debit Card: Why You Should Choose One Over the Other,” Credit Card Insider
The material made available for you on this website, Credit Intel, is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.