Choosing the Right Type of Credit Card for You

Introduction

Credit cards might seem like they’re all the same on the surface. They certainly look similar, but they’re actually each designed for specific needs, specific consumer demographics, and specific credit score ranges. Some offer specialized perks, and others don’t.

So, if you’re thinking about getting a credit card, or an additional credit card, consider the pros and cons of these seven types of cards before applying. They’re not the only types of credit cards available, but they represent a good starting point for determining which credit card is best for you.

Standard No-Frills Credit Card

What it is: A standard no-frills credit card typically comes without a lot of bells and whistles, other than the basics. That includes purchasing power, consumer fraud protection, and the ability to build a positive credit history — because creditors usually report your activity to one or more of the three major credit bureaus.

Like most other credit cards, these cards work on revolving credit. That means you can repeatedly use your credit card, up to your credit limit, after paying it down.

For example, if you have a $500 credit line and a current balance of $300, you have $200 in available credit. Once you pay off the $300 balance — as long as you haven’t made any more purchases or accrued additional interest or fees — you should end up with $500 in available credit again.

You use this type of credit card the same way as most other credit cards. That is, you can purchase items on the card and then pay them off, immediately or over time, as long as you make at least the minimum payment due. But you’ll accrue interest on any balance you don’t pay back in full — or on the entire balance if the card doesn’t have a grace period.

The annual percentage rate (APR) and any fees you’ll pay also depend on the individual credit card and the card issuer’s terms and conditions. Your credit score may have an effect too, with higher scores typically leading to lower interest rates and better terms.

Who it’s for: A standard no-frills revolving credit card can be for anyone, as long as they meet the card’s minimum qualifications. However, if you have a higher credit score, a steady income, and a positive payment history, you’re more likely to qualify for a credit card that offers better perks — like a cash back rewards card.

Cash Back Rewards Credit Card

What it is: A cash back rewards credit card provides cash back rewards on eligible purchases you make with the card. The reward is typically a certain percentage of the amount spent on eligible purchases, which is established by the creditor.

For example, one credit card may only offer cash back on gas and grocery purchases, while a second gives cash back on every purchase, and a third rewards purchases in tiers. That could look something like 5% cash back rewards on gas and groceries, and 1% on everything else.

Let’s say you make an eligible purchase of $100 with a 1% cash back rewards credit card. You should earn $1 (1% of $100) in cash back rewards for that purchase. You might be able to redeem those rewards for a statement credit, a cash withdrawal to a bank account, or a selection of gift cards and merchandise.

A cash back rewards credit card may or may not have an annual fee, depending on the credit card and issuer. If it does, you can do some quick math to figure out if the rewards benefits make the annual fee worth it to you.

Who it’s for: Since you’re getting cash back rewards on eligible purchases, these types of cards traditionally required a higher credit score for approval than a standard credit card. However, cash back rewards have become status quo in the credit card industry, so it’s not unheard of for modern subprime and even secured credit cards to offer cash back rewards.

Points or Mileage Rewards Credit Card

What it is: A points or mileage rewards credit card is similar to a cash back rewards credit card. But instead of earning cash back, you’ll get points that you can redeem for products or services — or airline miles to redeem for airline travel and other perks. You may still be able to redeem your points for the same types of statement credits or gift cards as a cash back rewards card, but it depends on the specific rewards structure.

Let’s say you have a points credit card that earns you one point for every dollar spent on eligible purchases with the card. If you make an eligible purchase of $100 with the card, you’ll earn 100 points redeemable for products, services, gift cards, or whatever else the program offers.

The credit card issuer establishes which purchases qualify as “eligible,” how many points or miles you can earn for those eligible purchases, and what the reward options are. Just like with a cash back rewards card, eligible purchases may fall under specific categories or may include anything purchased with the card.

Mileage rewards cards are a lot like points cards, but you earn airline miles instead of points. Sometimes you can only redeem the miles for flights on that specific airline, but many miles-based credit cards offer alternative rewards as well.

Who it’s for: These types of rewards credit cards are often targeted to people with higher credit scores. Many are travel-focused cards, so they tend to attract travel enthusiasts looking to earn airline tickets, hotel stays, or other travel-related perks. But a points-based credit card can be geared toward any specialized area or activity, including amusement park visits.

Rewards cards offering points or miles typically have an annual fee. So like with cash back cards, you may want to figure out if the rewards you expect to earn will be worth paying the annual fee for the right to earn them.

Balance Transfer Credit Card

What it is: A balance transfer credit card allows you to transfer balances from one or more other credit cards to that card. You can technically transfer a balance between almost any two cards, as long as you have enough available credit on the receiving card. But a card marketed specifically for balance transfers makes the process more attractive.

You’ll typically find a special low- or no-interest rate on the balance transfer amount for these cards, usually for a specified timeframe. It can be a good option if you’re committed to paying down higher-interest credit card debt.

But like with anything, you’ll find several pros and cons to a balance transfer. The primary pro is that it could help you pay off other credit card debt at a lower interest rate, which may let you reduce or eliminate that debt quicker because you’re not paying as much in interest.

One of the main cons is that the potentially lower interest rate on a balance transfer rarely lasts forever. If you fail to pay off the entire balance transferred before the balance transfer rate term expires, any remaining balance could be subject to a higher APR. And transferring a balance usually comes with a balance transfer fee of approximately 3% to 5%.

Who it’s for: A balance transfer credit card is primarily for someone looking to pay down existing credit card debt at a lower interest rate. You may need good credit to qualify for one of these cards, especially if it comes with a 0% APR offer. To figure out if a balance transfer is worth your while, be sure to read all of the terms and conditions, including what fees may be charged by the card issuer.

Charge Card

What it is: A charge card isn’t technically a credit card because it only extends you credit for up to one billing cycle. You have to pay the entire outstanding balance each month by the payment due date, with no option to make partial payments or carry a balance.

If you miss a payment or pay less than the total amount due, you’ll typically be charged a late fee. And the card issuer may suspend your charging privileges or even close the account.

Unlike most credit cards, charge cards typically don’t have a preset spending limit — but that doesn’t mean you have unlimited spending capability. The amount you’ll be allowed to charge can change, depending on your payment history, income, and other factors. To minimize their risk of having no preset spending limit, most issuers charge an annual fee.

Who it’s for: Charge cards generally cater to applicants with good or excellent credit. If you don’t want a predetermined credit line and have good credit, or you’re a small business owner, a charge card may be a good choice for you. American Express used to exclusively offer charge cards, and they remain the primary issuer of consumer charge cards in the U.S.

Retail Credit Card

What it is: A retail credit card — or store credit card — is a closed-loop credit card that can only be used with a particular retailer or group of retailers. It’s not a general-use card, so if you have a retail credit card for a specific home-improvement store, you can’t use it to buy groceries or book a flight through another merchant. To make their credit cards more attractive, retailers may offer sign-up discounts, loyalty rewards, and other perks.

Because retail credit cards typically have lower credit lines and can only be used with specific retailers or chains, they may have less stringent approval criteria. That tends to make them easier to get than traditional open-loop credit cards. You may also pay higher interest rates with store credit cards than with traditional credit cards.

Who it’s for: Retail credit cards are available for consumers with a wide range of credit scores. However, if your credit score isn’t high enough to qualify for a traditional credit card, a store credit card may be an option. If the retailer reports your account activity to one or more of the three major credit bureaus, you can often use these cards to build positive credit history.

Of course, that requires making consistent, on-time payments and maintaining a healthy credit utilization ratio — which means keeping your spending relatively low instead of splurging on every sale. But strategic use of a retail card may help you qualify for a different type of credit card in the future.

Secured Credit Card

What it is: All the cards we’ve looked at so far are unsecured credit cards, which don’t require any collateral for approval. Instead, they’re approved and granted based on your credit profile and promise to pay.

On the flip side, a secured credit card needs you to put down a security deposit as collateral. The deposit isn’t a credit line, doesn’t make it a pre-paid card or debit card, and can’t be used to pay down your balances. But the credit line is often equal to the deposit amount, so a $200 deposit would get you a $200 credit limit.

If you end up defaulting on the credit card, the issuer can use your deposit to cover their costs. Otherwise, you get it back (sometimes with interest) when you “graduate” to an unsecured card.

Who it’s for: Secured credit cards are primarily for two types of people. First, they’re attractive to those with no credit history looking to build credit, like a young adult or immigrant. They’re also a good fit for people with poor credit looking to rebuild.

The security deposit helps offset a creditor’s risk since both of these groups are more likely to default than applicants with higher credit scores. Besides the requirement for a deposit, a secured credit card works the same way an unsecured credit card does.

Secured cards are designed for building credit, so creditors almost always report activity to the credit bureaus. That means making small purchases and paying them off each month will go a long way toward proving your ability to manage credit. Many people move on to an unsecured credit card after using a secured card to establish a positive credit history.

What To Look For

Now that you know about all the major credit card categories, how do you know what to choose? Comparing these aspects will help you narrow it down.

Interest rate (APR)

• When it comes to interest rates, lower is always better, so look for the lowest APR you can qualify for. 

• Be aware that variable APRs can change, and take note of other important APRs that come with the account — like introductory or promotional APRs and penalty APRs.

Fees

• Most people want a card with no annual fee, but it’s more important to decide if the fee is warranted for the benefits you’ll receive. 

• Take note of other fees you might face, like finance charges, cash advance fees, late fees, balance transfer fees, and foreign transaction fees.

Rewards and benefits

• Choose rewards that align with your spending habits because there’s no point in having a card that provides benefits on things you don’t buy. 

• Compare your reward options, like cash back, points, or travel miles, and other benefits, like category-specific discounts.

Understanding Interest Rates and APRs

If you never carry a balance, have a grace period, and always pay in full before it ends, you might get away with not ever being charged interest. So in that ideal scenario, the APR may not be as important to you. However, if you think you could end up paying less than the full balance on any given month, considering the APR is crucial.

For some other financial products, the APR is higher than the interest rate because the APR includes fees and other finance charges. But for credit cards, these fees are typically broken out separately. As a result, credit card APRs and interest rates are usually the same thing.

But your APR isn’t the only number that impacts your finances. We’re talking about how much it costs you to borrow money, so you’ll want to understand several key terms before choosing a new credit card.

• Finance charge: This is the overall monthly cost of borrowing when carrying a balance, and includes any interest, annual fees, late payment fees, cash advance fees, and more. 

• Annual percentage rate (APR): This is the interest rate you’ll be charged if you carry a balance from month to month. APRs can be fixed or variable, and some cards may have more than one APR. Common rates include the purchase APR, promotional APR, balance transfer APR, cash advance APR and penalty APR.

•  Annual fee: This fee is charged yearly for as long as you have the card, although some creditors break it down into monthly charges to make it more manageable.

•  Late payment fee: This charge is triggered by failing to make at least the minimum monthly payment on time.

•  Grace period: This is the time frame you have for paying your bill before interest starts accruing. Not every card has a grace period, but the number of days will be stated in the Schumer box of the terms and conditions if there is one.

•  Minimum payment: This is the smallest dollar amount that you have to pay by the due date in order for your payment to be considered on time.

FAQs

If you still have questions, you’re not alone. Take a look at our answers to some common queries.

What are the main types of credit cards available?

The biggest credit card categories include standard no-frills cards, rewards cards that offer cash back, points or miles, balance transfer cards, charge cards, retail store cards, and secured credit cards. Each of them is designed to fulfill a specific purpose for a specific type of consumer.

How do I choose the right credit card for my lifestyle?

You know your spending habits and interests the best, so you’ll want to compare card options against what you buy and do. If you don’t like to travel, a card with an airmiles rewards structure probably wouldn’t be a good fit. If you typically use your card to buy groceries or fill up your gas tank, look for an option that rewards those purchases. And if you’re trying to build or rebuild credit, a secured card could be perfect for you.

What is the difference between a secured and an unsecured credit card?

A secured card requires a cash security deposit, which is often equal to the credit line. The creditor holds on to your deposit while you use the card, and only taps into that money if you happen to default. When you’re ready to graduate from a secured card, your deposit should be returned to you.

An unsecured card does not require a deposit because your credit history tells the issuer how risky or creditworthy you are as a borrower.

Are rewards credit cards worth it?

Rewards credit cards can be worth it if the rewards deliver more value than the card’s annual fee. If there’s no annual fee, there’s nothing to lose. If there is an annual fee, you might have to do some math.

For example, if the card has a $75 annual fee but you get 1% cash back and spend approximately $8,000 per year, you’d earn about $80 in rewards. That could be worth it for you. If you get 2% cash back on the same card, with the same purchases, you’d earn about $160 back, which is almost definitely worth it — as long as you don’t let interest charges eat up all the profit. Still, simply having access to credit could be worth the price of admission for you.

How does my credit score affect the type of credit card I can get?

Generally speaking, a higher credit score leads to higher credit limits, lower interest rates, and better terms all around. That could look like receiving better terms on the cards you already qualified for, or being approved for more attractive cards that used to be out of reach.

What is a balance transfer credit card, and who should use one?

A balance transfer card is designed for moving your outstanding balances from another card, and it often comes with enticing introductory offers or lower interest rates for balance transfers.

If you carry a balance and want to lower your interest payments, this is a great option. However, not everybody will qualify for the lowest rates or most attractive terms.

Bottom Line

Choosing the right credit card for your needs and lifestyle might seem like a big job, but it’s much easier when you divide your options into categories and narrow it down from there.

No matter which type of credit card you get, it’s important to manage it strategically so it can help you build a positive payment history and maintain or improve your credit score. When you do find a card you’re interested in, always see if you pre-qualify first so you can get an idea of your terms and approval chances before applying.