You may already know what a credit card is, but you may not realize the vast array of types of credit cards issued by credit card companies. You may also not quite realize all the differences between credit cards and debit cards.
Let’s go over the information you need to know about credit cards and what they can offer you. Furthermore, we’ll discuss whether they actually make sense for your needs.
What is a Credit Card?
A credit card, issued by a financial institution such as a bank, allows you to borrow money (with interest) from a bank using a line of credit. All credit card companies have specific terms that you, as a cardholder, must follow. When you use a credit card, you agree to repay the credit card company the amount you borrow in addition to any interest charges you incur.
It’s a good idea to understand the following about credit cards:
- Annual fee: The amount you pay to a credit card company on a yearly basis.
- Late fees: Your credit card company may charge you late fees if you don’t pay at least the minimum required amount due.
- Annual percentage rate (APR): When you carry a balance from month to month, you’ll pay a fee in the form of an APR. Some cards also carry penalty APRs, which means you pay extra if you don’t make your payments on time.
- Foreign transaction fees: You may have to pay foreign transaction fees when you use your credit card outside of the country.
- Perks: Know what types of perks a particular card offers, such as travel points.
- Introductory interest rates: Many credit card companies lure you with a low interest rate, then raise the interest rate later on! (Check into this possibility.)
- Grace period: A grace period is a small amount of time between the end of your card’s billing cycle and the date your payment is due.
- Credit limit: Knowing your card’s credit limit beforehand will help you stay well below it. Regardless of how you plan on using your credit card, it’s important to stick to a level below your credit limit to achieve the best credit score possible.
You also want to dig into the right type of credit card that fits you. Let’s get into that next.
Types of Credit Cards
Did you know that you can tap into several different types of credit cards? Take a look at the following:
- Standard credit cards: Think of standard cards as the simplest cards available. They extend a line of credit, balance transfers and/or cash advances. They often carry no annual fee.
- Premium credit cards: Premium cards offer specific perks like exclusive benefits but they usually have higher annual fees.
- Rewards credit cards: Customers can get rewards, such as cash back, travel points or other benefits based on how they spend.
- Secured credit cards: Secured credit cards are backed by a cash deposit you make when you open your account. You can usually put down a deposit equal to your credit limit. In other words, if you put down $300, you’ll have a $300 limit. A secured credit card works well for those who have had credit issues in the past.
- Charge cards: You can make purchases on a charge card. You must repay the purchases in full by the due date, usually on a monthly basis. Otherwise, you’ll have to pay late fees and face restrictions on further card use.
- Balance transfer cards: Usually used to transfer credit card amounts from one credit card company to another, a balance transfer credit card involves the transfer of outstanding debt to another credit card company.
Credit Cards vs. Debit Cards
What’s the difference between a credit card and debit card? Just to get clear about the differences between the two (because they look so similar!), bank debit cards link to your bank accounts when you open up a checking account. Prepaid cards don’t link to your bank account. You can load money on them ahead of time and use them for purchases.
Take a look at these differences between credit cards and debit cards:
- Debit cards keep your spending in check. A debit card can help you keep your spending in check by only allowing you to spend up to the amount of money in your bank account. A credit card allows you to charge up to your credit limit, which can end up being dangerous if you can’t pay the full amount back.
- No interest on your purchases with debit cards. You won’t pay interest on your purchases with a debit card. However, credit cards require you to pay interest when you don’t make your payments on time.
- You can use your debit card to withdraw cash from ATMs or get cash back when you make a purchase. Credit cards do not allow you to get cash back through stores when you make a purchase. However, you can get cash back rewards on your purchases or when you withdraw from an ATM or a bank teller. This is called a cash advance. Banks charge a fee when you convert part of your credit limit into cash.
- No credit history options with a debit card. You can’t build your credit history with a debit card like you can with a credit card.
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This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, UNest does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.
