What Type of Credit Card Should I Get?
Nowadays, applying for a credit card is like shopping around for your next car. There are dozens of choices with different types of credit card features and requirements. It can get overwhelming, and marketing by the banks isn’t helping either.
But the simple truth is that many kinds of cards exist because there are also many kinds of consumers, each with different needs. Getting the right one for you starts with figuring out which type of credit card user you are.
What is a Credit Card and What are the Types of Credit Card Users?
First, let’s define what a credit card is.
A credit card is a way for people to borrow from a bank or financial institution to pay for goods and services, instead of using cash. In return, the consumer agrees to pay the amount back at a specified time every month, plus any fees. If the individual fails to pay the amount back, interest will be applied to the outstanding amount and carried over to the following month.
In a nutshell, a credit card is another way to loan money from the bank.
There are different kinds of credit cards that fit the various types of credit card users and their needs. A student, for example, won’t need the features or high credit limits that a business owner might require.
Here’s a rundown of the 3 types of credit cards and their corresponding users.
Regular consumers comprise the majority of the credit card market. This segment is quite broad, hence there are plenty of types of cards within the category. A credit card example is one that earns rewards or travel miles. Consumer credit cards are covered by the CARD Act, giving cardholders consumer protection rights.
Most credit card companies classify students as a unique group because they are a special demographic. They have lower income but higher future earning potential thanks to their young age and education. Hence, most students enjoy more generous benefits and features that an older person with the same limited income usually won’t qualify for. For all intents and purposes, however, student cards are still classified as a consumer card. They are therefore covered by the CARD Act.
Business owners have unique financial needs compared to the average consumer, and that’s why they have a special card to match. Business credit cards often have higher spending limits, customizable rewards programs, and a tracking feature to help monitor and limit employee card spending.
Out of all the kinds of credit cards, business cards have the most stringent requirements. It includes the need to submit a social security number (SSN) as proof of ownership. Business card holders are also not covered by the CARD Act, although some issuers make an exception to this rule.
Pros and Cons of Using Credit Cards
There are two major benefits of using credit cards.
One is convenience. It frees you from having to bring cash all the time or withdraw from the bank whenever you run low. In the digital age, credit cards are also the primary way to buy goods online.
The other is that it gives you greater purchasing power. With a credit card, you can buy something that you might need right away, but for which you don’t have the current funds. Crucial purchases like hospital bills are an example of this.
Cards are also much more secure compared to cash. If stolen, they can be blocked immediately to prevent further use by the thief. Of course, the flip side is that card information is much easier to steal online.
Credit cards also offer rewards, which give you the ability to earn points while using your card. You can use these points in exchange for goods, services, or airline miles. There are also other perks, like credit cards that offer discounts at specific retailers and establishments.
Lastly, credit cards are great for improving your credit history. Every time you pay your balance in full, it will reflect positively with credit reporting agencies.
Of course, credit cards are also dangerous if not used and managed correctly. Because they give the illusion of higher spending power than what you can afford, credit cards have the potential of incurring a large amount of debt. Paired with a very high interest rate, it can seriously derail a person’s financial health.
Credit Card Requirements
It’s relatively easy to get a credit card as long as you fulfill the following requirements:
Minimum Age of 21 Years
The age requirement is there because of the CARD Act, which prevents banks from selling products to people (in this case, minors) who lack the ability to pay for them. However, if you’re younger than 21 it’s still possible to get a card, provided you have a proven source of income.
Proof of Income
This is one of the more critical details to banks. Remember, with a credit card you’re basically borrowing money, so they need to be sure you can pay them back. The one exception is if you’re a college student, in which case the banks may approve your application even if you have a limited income at the moment.
You have the option of declaring all or only a portion of your income when applying for a credit card. However, be aware that banks use that information to both approve/decline your application, and to determine your credit limit.
Positive Credit History
As with any financial product and service in the U.S., your credit history is an important factor in your credit card application. Good credit history is yet another indication of your ability (or inability) to pay your credit card bills.
Issuers usually look for credit scores of at least 700 on average. Premium cards will have a higher minimum, plus the requirement that you have at least seven years of good credit history.
If you have a low credit score, you can still get a credit card but with some restrictions. It will often have higher fees and interest rates, but mostly what you’ll get is an unsecured credit card. This requires you to place a deposit with the card issuer before you can get approved.
The Different Types of Credit Cards
Dozens of card issuers offer countless different card types that have varying perks and benefits. However, the reality is all of them can be classified roughly into these three types of credit cards.
This a type of credit card that, as the name suggests, rewards you whenever you swipe. This can be a cashback or discount, but commonly it’s for earning points. These points can be exchanged for goods and services, or free plane tickets in the case of travel rewards cards.
Credit cards with the best rewards programs are often available only for individuals with excellent credit standing.
This type of credit card helps you save on your card purchases by lowering interest charges.
Low-interest credit cards are particularly useful for people in debt. Most people get a balance transfer card, for example, to consolidate all of their debts into that one card at low or sometimes even 0% interest. The only drawback is that low-interest cards are often available only to people with at least decent credit scores.
A secured card requires a deposit before it will be issued to you. It’s often the only card that someone with a bad credit history can get. However, this can be a good thing because a secured card is excellent at rebuilding low credit scores by paying your bill in full every month.
Considerations When Applying for Credit Cards
The annual percentage rate (APR) is an important, if not the most important, consideration when choosing a credit card. Even if you always pay in full, you’ll never know if there’s a time in the future where you can’t.
Of course, everyone wants to get the lowest rate possible. However, it’s more realistic to look at the rate with your credit score in mind. Then, see if the interest is fair for you.
If your credit score is excellent, you’ll have access to a broader range of rewards programs to suit your needs and lifestyle. Some features, like airline miles, are fantastic for frequent travelers.
That being said, rewards cards aren’t for everyone. It’s best for those who use their cards regularly and can pay them back in full every month.
Annual and Hidden Fees
Credit cards are notorious for having hidden fees that aren’t made upfront, so you should do your due diligence. Read the fine print on your credit card agreement, and make sure you’re aware of all the fees and benefits before you apply.
Do You Need Credit Card Debt Relief?
Credit cards can be a double-edged sword. If you have mounting credit card debt, contact us right away. Our experts at CreditAssociates can provide debt relief assistance and get you back on track financially.