Types of Credit CardsSeptember 26, 2010 - 11:11 am
If you thought all credit cards were the same, think again. One of the most important things to know before you apply for a credit card is that credit cards are different. Keeping this in mind will help you choose the best credit cards, prepaid cards or even charge cards.
Standard Credit Card
What most people are referring to when they say credit card is a standard credit card. The standard credit card has a pre-set credit limit against which you can make purchases each month. Your purchases accumulate and reduce your available credit. A minimum payment is due each month based on your interest rate and credit card balance. There are late payment penalties when you don’t make your minimum credit card payment.
Standard credit cards also come in several different flavors: rewards credit cards, student credit cards, business credit cards, balance transfer credit cards, and bad credit credit cards.
Secured Credit Cards
Secured credit cards behave like standard credit cards, but there’s a big difference. With a secured credit card, you make a deposit against the credit limit on the credit card. Your credit limit ends up being some percentage of or the same as your security deposit. For example, if you make a $1,000 security deposit, you can expect your credit limit to range from $500 to $1,000.
When you make charges on a secured credit card, the charges take away from your available credit, not your security deposit. Your security deposit is only used if you fail to make payments on your credit card balance.
Secured credit cards are a good option for people who can’t get approved for a standard credit card because they have bad credit or no credit history at all.
Through they’re often referred to as prepaid credit cards, prepaid cards aren’t really credit cards at all. Prepaid cards don’t check your credit history for approval and there’s no credit limit available for your purchases.
To use a prepaid card, you must deposit money onto the card. When you make purchases, they are deducted from your balance. Once all of your deposit has been used, you can’t make purchases until you load more money onto the card. Prepaid cards do behave like credit cards in the sense that they can be used in places that credit cards are accepted.
The first type of “credit card” was a charge card. The primary difference between a charge card and a standard credit card is that your full balance is due by the due date. You don’t have the option of making minimum payment or carrying your balance for several months. There are stiff late payment and interest penalties when you don’t pay your charge card balance on time.
Charge cards are not as common and are more difficult to get than standard credit cards. Not only do you need a good credit history, you’ll also need a good-sized income to qualify for a charge card.
Charge cards typically don’t have a standard credit limit that applies to all their credit cards. Instead, each cardholder is given a spending limit based on your income and payment history.