Types of Credit Cards: Understanding the Differences

Here are some of the main types of credit cards:

• Standard credit cards are the most traditional type of credit card; they allow you to spend up to a pre-set credit limit.
  
• Rewards credit cards operate similarly, but offer rewards such as travel points or cash back (usually in the form of a statement credit).
  
• Balance transfer credit cards usually have low introductory interest rates to make it more attractive to transfer balances from other credit cards.
  
• Charge cards have no present spending limit, but the balance on the card will need to be paid in full each month.
  
• Student credit cards are for college students seeking their first card.
  
• Business credit cards can be used by business owners and employees, and may offer business-focused rewards.
  
• Secured credit cards require a cash security deposit that reduces risk for the credit card company.
  
• Store credit cards can only be used with specific retailers.
  
• Prepaid cards are not true credit cards; you have to load them with cash before you can use them for purchases.

Standard credit cards are the most traditional type of credit card. Understanding how they work will give you a good foundation for understanding the other different types of credit cards, such as rewards and balance transfer credit cards, which essentially operate the same way but offer additional features.

Standard credit cards allow you to spend within a pre-defined credit limit. Your credit purchases are pooled together onto a credit card statement covering a specific period, typically a month. If you pay the statement purchase balance each month on or before the due date, then for most charges, you will not be charged interest on that revolving balance. The exception to this is certain transactions such as balance transfer or cash advances where interest will still apply. The balance that you carry over every month—on which you will pay interest—is known as “revolving credit.”  You must make the minimum payment each month to keep current and avoid late fees. Card issuers will often charge an annual fee as well for certain credit cards, though “no annual fee credit cards” also are available.

The interest rate on a standard credit card is called an annual percentage rate (APR). Most credit cards charge a variable APR, although some cards offer introductory 0% APR for a certain period of time, generally between 12 to 21 months.¹ Some types of credit cards, known as subprime cards, may have even higher APRs as well as additional charges, and are typically designed for people who lack good credit.

With rewards credit cards, you earn financial rewards as you spend. These vary considerably, but at a high level, there are three main types of rewards cards:

• General rewards points. You earn points based on eligible purchases that you make. You can typically redeem these points in a variety of ways. Depending on the card provider, your points may go further if you use them to make purchases with the card issuer’s partner companies.

• Travel rewards credit cards. You can usually earn points or miles with travel rewards cards. These cards typically allow you to earn points when you make select travel purchases, or in some cases, when you make other purchases as well. These points or miles can add up quickly if the card offers generous rewards for certain category purchases. You can redeem points and miles in a variety of ways and may be able to use them towards flight purchases, hotel stays, and more.

• Cash back credit cards. Cash back is another type of reward. With a cash back card, you will typically receive a percentage of your spending back, often in the form of statement credit.

There are more options for rewards credit cards than any other type of credit card. For example, travel credit cards can break down further into airline miles and hotel credit cards, any of which may also be a “no-foreign-exchange-fee” credit card. Conversely, some rewards credit cards offer multiple types of reward. However, apart from the fact that they offer rewards, these cards mostly operate in the same way as standard credit cards.

Some credit cards let you transfer balances from other cards. However, balance transfer cards usually offer a low introductory interest rate specifically for that purpose. The interest rate can be as low as zero, but it typically only operates for a short period of time (as little as six months), after which it reverts to a higher standard interest rate. You may, however, lose the introductory rate if you miss a minimum payment or pay late. You typically need a good credit score to qualify for a balance transfer card—and even better credit scores to get a 0% introductory APR balance transfer card.

Charge cards work differently from standard credit cards. There’s often no pre-set spending limit, but in general you must pay off the balance in full every month. There’s no interest charge if you pay on time, but late payments may incur fees. However, some charge cards allow you to pay off part of the balance, with interest, over a longer period. Charge card providers usually charge an annual fee. Typically, you need a good to excellent credit score to qualify for a charge card.

If you’re a young person looking for your first card, you may find it hard to qualify for most types of credit card because you haven’t accumulated much credit history. However, if you’re a student, you may qualify for a student credit card.  Several types of student credit cards are available, including rewards cards, cash back cards, and cards with low-interest introductory periods.

APRs on student cards are similar to those on standard credit cards. It’s worth looking for cards with low APRs and zero fees.

If you are running a small business, you might consider paying for business expenses with a business card. Like personal cards, business cards can be a straightforward way to gain access to financing, but the balance will typically need be paid in full every month otherwise interest will start accruing. Some business credit and charge cards may have extensive rewards programs geared towards the needs of businesses and their owners.

If you don’t have a credit history or if you have a low credit score, you may not qualify for a standard credit card or a rewards card. As an alternative, you could consider a secured credit card.

To obtain a secured credit card, you need to make a substantial security deposit, typically equivalent to the credit limit on the card. You can then use the card like any standard credit card. These cards don’t usually offer rewards, though some offer cash back on certain types of purchases such as groceries and gas. Some cards can be upgraded to a standard card after a period of time, provided that you haven’t missed payments or paid late.