Credit cards offer convenient, on-demand borrowing. Many also come with promotional offers and rewards that can be advantageous if used right. But which type of card should you get? This guide will provide you the answers you need.
An introduction to credit cards
A credit card is a convenient way to buy things and pay for them over time. In essence, you’re borrowing money at a moment’s notice to make purchases.
When you make purchases with a credit card, you can repay your entire balance each month or carry a balance month-to-month. If you decide to pay over time, you’re said to be “revolving” and the card issuer will charge you interest.
Absent a promotional offer, the rate you’ll pay is the annual percentage rate or APR applicable to purchases. You’ll know the generic APR range before you apply for a card, but you’ll only know the rate applicable to you after you’re approved.
The card issuer will determine your credit limit after they review your credit score, income, and other factors to assess your ability to pay. They’ll also use this information to determine your APR.
Federal law tops out your liability for unauthorized use of a credit card at $50, so you’ll be protected if your card is lost or stolen. You’re not liable for unauthorized use of your credit card if you report the loss before it’s used.
Here’s a summary of credit cards’ benefits and drawbacks:
|The Pros||The Cons|
How to qualify for a credit card
To qualify for a credit card, you must be at least 21 years old and fill out an application. If you’re younger, but at least 18, you can qualify for one if you either have a co-signer that’s at least 21 or you’re able to demonstrate an independent means of repaying the card obligations.
The application process is simple and can be completed online. You’ll need to provide information about your:
- Occupation and employer
- Your income
- Personal information such as your social security number
- Other accounts you may have such as checking or savings
The card issuer will review your credit scores and credit history to determine the interest rate they’ll charge you. They’ll also determine the size of your credit line if you’re approved.
Because of its importance, it’s a good idea to figure out your credit score beforehand and apply for credit cards which you’re likely to be approved for.
Finding the best credit card for you will depend on your credit profile, your purchasing habits and your experience using credit. Below we explore popular choices.
Balance transfer credit cards
With a balance transfer, you get a new card with a cheap rate to pay off other credit and store card debt. If you have good credit and you’re paying credit card interest, consider a balance transfer.
You’re still borrowing money, but at an introductory rate that’s usually zero percent. By law, introductory rates must last at least 6 months, but they can go on much longer than that.
By avoiding interest and interest compounding, you can get out of debt faster. That’s because you’ll free-up cash that you would’ve spent on interest charges and your balance won’t grow as fast.
Introductory rates are for a limited time only
When the promotional offer ends, your applicable interest rate will change to the regular purchase APR on the card. You definitely want to plan your monthly payments so that you’ll have paid off the transferred balance by the time the promotional period ends.
Our credit card payoff calculator can help you figure out the monthly payment you’ll have to make to eliminate your balance before the offer period ends.
Most cards charge a balance transfer fee
These cards will charge a balance transfer fee that’s typically in the 3% to 5% range. And the percentage is applied to the amount of your transfer. So if you make several transfers, you’ll pay the fee on each of them and it’ll increase your balance.
That means you can pay the fee over time as you pay down the balance you’ve transferred. Even with this fee, a balance transfer can save you money, since you won’t pay interest during the promotional period.
Here’s a simple example.
0% APR balance transfer
For illustration, let’s say you’re looking to transfer $5,000 with the following simplifying assumptions:
- The new card offers a 0% APR for 15 months with a 5% balance transfer fee.
- You’re making monthly payments of $125 on the $5,000 balance.
- The regular APR you’re paying on the current debt is the same as that of the balance transfer card after its 0% APR offer expires, or 15%.
With these assumptions, the estimated savings from the balance transfer during the promotional period would be about $601:
The above is a hypothetical example of how much you could save during the promotional period of a balance transfer. Your actual savings may be different, depending on your particular situation and your credit card offer.
If you’re interested in evaluating balance transfer offers using your own assumptions, this balance transfer calculator can simplify things for you.
» Related: You can learn more about balance transfers here.
Cash back credit cards
Cash back credit cards will earn you cash as a percentage of the purchases you make with them. And they typically pay the accrued cash back as a credit to your account.
This type of card might be a good fit if you typically pay off your balance in full every month. If you run a balance with this type of card, interest charges may eat into your rewards, reducing your cash back benefit.
How do banks manage to pay cash back? When you use your card to make a purchase with a merchant, that merchant pays the card issuer a fee known as the interchange fee. For retail purchases, the interchange fee can be above 2% of the purchase price.
Banks and other institutions competing for your business through cash back reward offers share some of this fee with you. They do so with the expectation that they’ll make money from interest and other fees if you carry a balance month-to-month.
How much cash back can I get?
Your total cash back will largely depend on the following:
- Your spending categories
- How much you spend per month
- Introductory bonuses
Cash back percentages generally range from 1% to 5%. While some cards will offer you higher percentages in categories they specialize, others will earn you more by enrolling in or activating quarterly rewards programs.
Some cash back cards come with an introductory bonus for new customers. This bonus usually kicks in after spending a certain amount with the card, typically within the first 90 days of account opening.
If you get a card that offers a bonus and you qualify for it, this bonus will be more important in your selection criteria. Especially if you’re planning on only holding on to your card for one year or less.
Which cash back card is right for you will largely depend on which categories you tend to do your spending and by what amounts. Knowing this information will help you determine the reward structure that better suits your spending habits.
» Related: You can quickly compare the reward configuration of cash back credit cards here.
0% APR credit cards
A 0% APR credit card can save you money when planning large purchases or tackling large expenses. These cards offer you 0% financing for the duration of their introductory rate, which can result in big savings.
With this type of card, it’s important that you make your monthly payments on time to ensure you don’t lose the introductory rate. It’s also a good idea to plan on repaying your balance in full when the offer period ends. Otherwise, you’ll start paying the (higher) regular interest rate on any unpaid outstanding balance.
Zero APR cards can help you save money, but you need to keep track of when your introductory offer period expires. Doing this can help you plan your monthly payments and avoid paying any interest.
» Related: Our 0% APR card comparison tool will save you time when evaluating offers.
Zero interest vs deferred interest
Beware of store cards that offer you financing for large purchases. Many sound similar to a zero interest offer, but typically are deferred interest promotions. These cards promise that you won’t incur interest during the promotional period, if you pay off your balance by the end of the offer.
The key words to watch out for in deferred interest offers are “if you pay.” If you don’t pay your entire promotional balance when the offer period ends, then you’ll be charged deferred interest. That’s the interest you’d have paid on your balance from the time of your initial purchase.
Credit cards for bad credit or no credit
If you have bad credit or no credit history, secured cards are a simple way to rebuild or build your credit score. Your card activity is reported to the credit bureaus, just like that of any other credit card. And once you’ve improved your score, you can apply for an unsecured card.
Secured cards work just like a regular credit card, but you’ll need to make a cash deposit as collateral in order to get one. This deposit is usually your credit limit and guarantees your repayment. The deposit is refundable if your account is in good standing.
A secured card might be right for you when:
- Your credit score is below 600
- You can’t get approved for an unsecured card
- You have no credit or limited credit history
- You’re trying to rebuild credit
Almost anyone can get approved for a secured card since the card issuer isn’t taking on repayment risk. As most issuers won’t extend a credit line higher than your security deposit, they’re protected for non-payment.
Secured cards look just like regular cards
Secured cards look just like unsecured credit cards and no one will be able to tell that it isn’t a regular card when you make purchases with it. Having a security deposit doesn’t mean that you don’t have to worry about making payments, though.
You still have to make your monthly payment and you’ll receive a monthly statement just like any other credit card.
Other conditions remaining the same, if you make all your payments on time for about a year, you’ll have built enough of a credit history to apply for an unsecured credit card. If you’re approved, you won’t need to make a deposit.
You don’t need to carry a balance to build credit
With a secured card, you build credit through your responsible credit behavior and by making your monthly payments on time. You don’t need to carry a balance with a secured card to build your credit. Besides, running a balance can be painful on your wallet.
That’s because secured credit cards have some of the highest interest rates and fees in the market. If you get a secured card, avoid carrying a monthly balance, if you can.
Secured cards offer benefits you won’t find with prepaid cards
Credit card transactions, including secured credit card transactions, are protected under the Fair Credit Billing Act and the Electronic Fund Transfer Act. If your card is lost or stolen, your liability for unauthorized use is a maximum of $50.
Depending on your issuer, your card may come with additional benefits like free credit monitoring, credit education tools, the ability to increase your credit line if you pay on time, and even rewards. You won’t find those benefits with most prepaid cards.
» Related: You can quickly compare secured card offers with our free comparison tool.
Top credit cards do’s and don’ts
Avoid interest charges
If you pay your statement’s balance in full by its due date, you’ll avoid interest on any new transactions that post to your account. The number of days you have to pay your bill in full without triggering a finance charge is known as your grace period.
Keep track of promotional periods to avoid interest charges
If you get a card with a promotional offer, keep a watchful eye on its expiration date. Once the offer expires, you’ll incur interest charges on any outstanding balance at the regular purchase APR.
Pay more than your minimum due each month
Pay more than the minimum due each month to pay off your balance faster. Keep in mind that your bank will charge you interest on any unpaid outstanding balance after your promotional rate expires, even if you make the minimum payment.
Avoid late and missed payments
Keep track of your credit card due dates since late and missed payments will stay on your credit file for 7 years, they will drag down your credit score, and your bank might charge you additional fees. If you have a promotional rate, you want to avoid the chance of losing it by paying on time.
Don’t make purchases with a balance transfer card
Avoid using your new card for purchases; use it instead as a money-saving and debt repayment tool. Even if the card comes with a 0% APR promotional rate on purchases, avoid the temptation to use it. It can lead to higher debt and derail your financial well-being.
Don’t use your credit card for cash advances
Be wary of cash advances. A cash advance is when you use your credit card as an ATM. The credit card company will start charging you interest on the same day you draw the cash and you’ll incur a hefty transaction fee. There’s no grace period with a cash advance.
It can be tempting to use your credit card as a cash machine, but avoid the temptation. Cash advances can get you into debt faster.
Don’t go around applying for multiple credit cards at a time
Every time you apply for a credit card, the card issuer gets your credit information, generating a hard credit pull. Avoid applying to multiple cards during a short period of time, since hard pulls will hurt your credit score.
The bottom line
Used responsibly, a credit card is a useful tool that should be part of your financial toolkit. There’s literally hundreds of credit card offers you can choose from, so figuring out the one that’s right for you can feel a little overwhelming.
Maximize your chances of approval by figuring out your credit score before you apply. Know the things that are important to you in a card, (cash back, balance transfer, 0% APR, secured card) and compare several offers before selecting one.