The basics
A credit card is a card, usually made of plastic or metal, that allows you access to a line of credit offered by the bank that issued the card. Basically, it’s the bank that covers your purchase but it requires you to pay the money back according to a predetermined agreement.
Your credit limit (the maximum amount you’re allowed to spend) is determined by several factors including your income, existing debts and credit available on other cards. Repayment options vary. You may have to pay a certain amount over time or the entire balance in full at the end of every month. Paying in full is usually the best option, by the way, because it includes a grace period that allows you to avoid paying interest. A record of your payments is made to credit bureaus who prepare credit reports. These reports affect your credit score, a three digit number that affects the amount of money you are able to borrow.
Credit cards have been around for over 60 years and they’re an essential part of daily life. But with so many different options on the market, confusing financial terms and frequently misleading advertisements by irresponsible card companies, it’s difficult for people to know what kind of credit card works best for them.
Understanding the basic credit card types is the first step to being a responsible card holder.
The types
There are essentially two types of credit cards.
Secured cards require you to deposit a certain amount with the bank before you use them. The deposit acts as security in case you’re unable to repay the amount you owe.
Unsecured cards do not require an initial deposit. Your credit history is used to determine a specific amount the bank is willing to lend you. You then repay it according to certain terms and conditions.
These are the essential types of credit cards, but within them, you have many different options. Let’s take a look at some of the more popular ones.
Rewards credit cards give you a reward for each purchase you make. There are different types of rewards cards. Some of them include:
Cashback cards that give you money back on various purchases that may include groceries, utilities and miscellaneous purchases, either in the form of a check or a deposit in your account.
Travel rewards cards earn you airline miles or points towards flights, hotels, car rentals, exclusive airport amenities and more. They’re a great option for frequent travellers.
Retail rewards credit cards are customised according to the kind of shopper you are. They can be used for gas, groceries, clothes, etc.
Rewards credit cards, in general, are a good option if you pay your bill in full at the end of every month. Carrying a balance isn’t a good idea because of interest charges that reduce the value of the rewards you’re eligible for.
Low interest credit cards provide lower interest rates which makes it less expensive to carry a balance. They usually offer a 0% introductory APR period which allows you to pay off large purchases without interest during a specific timeframe.
Balance transfer credit cards allow you to transfer your existing debt to another card-issuer to take advantage of lower interest rates.
Student credit cards (only available to students over 21 except under special circumstances) are designed for students. They often offer rewards in the form of discounts for accommodation, food, electronics and textbooks.
The safeguards
All cardholders are entitled to legal protection from banks and credit card companies should they try to take advantage. There are many rules and regulations in place to provide you from unfair practices.
The Credit Card Accountability Responsibility and Disclosure Act (CARD) Act of 2009 is a federal act passed by the Congress to “establish fair and transparent practices relating to the extension of credit under an open and consumer credit plan, and for other purposes.”
The act eliminates unfair practices such as hiking rates on existing balances and allowing cardholders to go over the limit without warning and then being fined. It ensures that credit card issuers are legally obliged to explain rates and fees to prevent cardholders from being blindsided by hidden costs. The act also gives you the right to dispute credit card charges. That’s why it’s so important to keep track of your expenditures. If you notice you’ve been charged for a purchase you haven’t made, you have the right to dispute those charges.
Ultimately, how much a credit card benefits you boils down to how responsibly you choose and use one. Used right, a credit card is an easy, efficient way to secure a favourable credit history – for life.