Deciding on the right credit card type depends on several factors. But the main thing you need to consider is how you’ll be using the credit card. This will help determine whether you’ll need to get a credit card that comes with an annual fee, or whether you need to choose a credit card that brings you rewards. In this article, we’ll give you a rundown of all the factors that govern what type of credit card might be the right fit for you.
But first, we’ll go through the basics of credit cards to provide you with a starting point for understanding the subsequent features.
How Do You Use Credit Cards?
Every credit card transaction is carried out identically:
- Swiping or inserting your credit card – If you’re at a store, you’ll need to swipe your credit card through a card reader. If you’re using a chipped EMV card, you’ll insert it into the designated slot and leave it there until the machine reads your card. For online purchases, you’ll enter your credit card information instead.
- Authorizing your purchase – The reader gets in touch with your credit card provider to make sure your card is valid, and that there’s a sufficient amount of money to cover the purchase. If good to go, you’ll get an authorized purchase.
- Paying the seller – Your credit card issuer sends the necessary amount of money to the seller.
- The payment – A statement shows the completed purchase, and you now pay your provider back.
How Do You Obtain Credit Card Rewards?
There are two main kinds of credit card bonuses:
- Miles or points – You can exchange your miles and points for merchandise, gift cards, apply them toward the purchase of travel tickets, credit, etc.
- Cashback – You can reduce your balance using cashback. Some banks allow you to get cashback in the form of checks or deposits.
To determine the value of your rewards, credit card companies use two types of systems:
- Flat rate – No matter how much money you spend or what you spend it on, your rewards have the same value. For instance, you may receive three points for every dollar of your purchase.
- Bonus rewards – Bonus rewards are based on the location of your purchase, rather than the amount. In this system, every seller has a category, and with each transaction completed at the store, you receive bonuses depending on the seller’s category. For example, you can get 6 percent cashback for purchases at gas stations.
All the rewards you obtain end up in your rewards account. Here’s what the full rewarding process looks like:
- You pay for a product or service with your credit card.
- Reward calculation – Your credit card provider checks whether your seller falls into a certain category of bonuses, and calculates the amount of your bonus accordingly. If the seller doesn’t have a category, your issuer calculates the bones using the flat rate.
- Your reward is transferred to your account – It may take several days to several weeks for your rewards to appear in your bank account.
- Redeeming your rewards – Log into your account to redeem your cashback and use online tools such as Expedia or Orbitz to exchange your miles or points for travel tickets, depending on your credit card.
How Is Interest on Credit Cards Charged?
Whenever you borrow money from your bank to complete a purchase, and you carry the debt over to the next month, the bank will charge interest depending on your rate. The system goes as follows:
- Your provider determines your interest rate – Typically, the higher your credit score, the lower your interest rate will be.
- The interest rate shows up on statements – Interest rates are usually calculated annually, but credit card companies normally charge them every day.
- Your provider calculates your debt at the end of billing cycles – Depending on your daily rates and balances, your issuer calculates your debt.
- The interest is included as a minimum payment for the next month.
What Types of Credit Cards Are There?
You can choose from six major types of credit cards:
Balance Transfer Credit Cards
The main benefit of this type of credit card is that you can move the balance from a card with high interest to a new card with a lower one. The new card allows you to use it at a 0 percent interest rate for 12 months or more until you pay off the debt on your previous credit card. The transfer will come with a fee, but it may be worth it due to the ability to save a lot of money on interest.
Rewards Credit Cards
As previously mentioned, rewards credit cards earn you cashback options, points, or miles. Here are the most widely-used rewards credit cards:
- Cashback cards
- Airline cards – When you use an airline credit card, you receive miles you can exchange for upgrades for a specific airline or free flights.
- Hotel cards – Using hotel credit cards brings you points you can use for staying at a specific hotel. Perks that these points can ensure include automatic upgrades, free nights, elite status, etc.
- General travel cards – Whenever you use a general travel credit card, you earn points to pay for travel. Expenses you can cover include hotels, airlines, etc.
0% and Low-Interest Credit Cards
These cards are ideal for users who expect their debt to roll over from one month to the next. With a 0 percent interest credit card, your card can remain interest-free for more than 12 months. On the other hand, low-interest cards don’t have the 0 percent option, but they’re still a viable choice for long-term purchases.
Small-Sized Business Credit Cards
The target customers of these cards are small business owners and entrepreneurs. It can facilitate business operations by offering a series of benefits such as cost-tracking expenses, cost-free employee cards, etc.
College Student Cards
Since students aren’t likely to have a full-time job or a long credit history, these are an ideal option for them. They enable college students to become familiar with the concept of credit scores.
Credit-Building Credit Cards
The higher your credit rating, the greater the odds of gaining access to perks such as 0 percent interest periods. However, reaching a high credit score takes time and a certain level of financial responsibility. One of the ways you can improve your credit score is by getting credit-building credit cards. Here are the types you can use:
- Secured credit cards – The credit limit on a secured credit card is equal to the amount of money you deposit into a special account. Your credit card provider uses this deposit as protection in case you fail to make your payments. As such, these cards are great for people with a credit score lower than 630.
- Low-credit-score credit cards – These are also designed for people with a low credit score. But unlike secured cards, they don’t require you to make a deposit. Instead, they come with high fees.
- Fair-credit cards – These credit cards are meant for users with an average credit rating. This includes the range between 630 and 689.
How Should You Choose Your Credit Card?
To decide which type of credit card works best for you, you need to consider the following aspects of using each type:
It can be difficult to compare credit cards in terms of the rewards they offer since some providers use cashback, and some use miles or points to reward their customers. Nevertheless, there are three factors you should look for that apply to all types of rewards:
- Earn rate – What are the rewards you get for each purchase?
- Exchange options – How flexible are the rewards you earn?
- Exchange value – What’s the value of your rewards when you use them?
Another bonus-related factor you should take into account is the sign-up bonus that usually accompanies obtaining credit cards. For instance, some issuers may grant you a $200 bonus in cash, or 50,000 points you can use during the first couple of months.
Even though most people aren’t fond of the idea of paying a fee for just using a card, getting a credit card at an annual fee is advantageous for many reasons:
- You can obtain a card without banks checking your credit history. This way, you can get a card for which you otherwise wouldn’t qualify.
- You can access numerous perks such as free hotel stays, upgraded airline travel, etc.
- Your reward rates are much better.
Overall, the main question you should ask yourself is whether or not the amount of money you can get by using the card is larger than the amount of money you’ll need to allocate for the annual fee.
Several other fees come into play when deciding on your credit card. These include:
- Cash advances – If you want to draw some cash with your credit card, it will usually come at a high fee. Moreover, there are typically no grace periods, meaning that your interest payments will have to start immediately.
- Balance transfers – Relocating debt to another card normally entails a fee of up to 5 percent of the amount relocated.
- Fees on returned and late payments – These fees can get especially high, and most credit card providers charge them.
- Foreign transactions – The standard fee for international purchases is 3 percent.
Introductory and Ongoing Interest Rates
Introductory interest rates are normally extremely favorable and are meant to attract persons with a great credit rating. Not all banks offer an initial 0 percent interest rate, but most issuers go very low.
Once your introductory period expires, you’ll get an ongoing interest rate. This is dependent on your credit score, and the higher it is, the lower your interest rate will be.
Another significant factor that dictates your interest rate is the so-called prime rate, which is the rate that banks charge for their best customers. Your personal interest rate is calculated by adding percentage points to the prime rate. For example, under a prime rate of 5 percent, your rate might be prime plus-5, amounting to an interest rate of 10 percent.
Another feature you should look for in your credit card issuer is whether or not the company can help you improve your credit. This is what banks can offer to boost your credit over time:
- Timely payments rewards – If you make timely payments, some providers can give you higher credit lines or a better rewards rate.
- Credit bureau reports – Responsible financial activities reflect positively on your credit rating. For this reason, make sure that your bank compiles accurate reports about your activities (on-time payments, etc.) so that your rating can improve.
- Upgrades – Once you’ve reached a certain level of credit rating, having the ability to obtain a better card is extremely beneficial.
Accessing perks usually entails paying a high annual fee. The fee might put some people off, but the value you receive from the perks generally exceeds the annual cost. Check whether your credit card offers the following perks:
- Cell phone insurance
- Hotel and airline benefits
- Purchase protection (prolonged warranties)
- Statement credits
- Rental car coverage
- Credit security and tracking
How Do You Make a Decision?
After you’ve examined various credit card issuers with regards to these features, there are three steps you should take to reach the final decision:
- Examine your credit score – You need to check your credit score to see what types of credit cards you can obtain. Naturally, higher credit score ratings will give you a better selection.
- Make a general choice – If you need to improve your credit score, go for a credit card that will help you boost it. In other cases, decide if you want to go for low-interest cards or credit cards that feature better rewards.
- Narrow down your choice – Decide whether you need greater cashback or miles and points options. Also, either go for 0 percent or low-interest rates if you’re looking to save money.
Inspect a variety of credit cards from more than one provider, see which card ticks the most boxes, and enter its application process.
Comparison of Some Of The Best Credit Cards
Specification: American Express Cash Magnet Card
Specification: American Express Gold Card
Specification: Chase Sapphire Preferred Card
Specification: First Access Visa Solid Black Credit Card
Specification: First PREMIER Bank Mastercard Credit Card
Specification: Freedom Gold Card
Specification: Merit Platinum Card
What Companies Issue the Best Credit Cards?
Finally, here’s a brief overview of the best credit card providers. Here are the top five issuers according to the quality of their service and the customer satisfaction index.
- American Express
Given the proven track record of these five companies, they should be the starting point of your search for the ideal credit card. Take your time and carefully consider each abovementioned feature to find a proper long-term solution.