Different types of credit cards: How to use them properly? – that will be the topic of today’s article.
Knowing the proper usage of different credit card types is essential for budget management.
If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).
Introduction
Everyone has a credit card these days, and by everyone, I mean almost everyone. Even though all people have credit cards, most of them do not use them properly.
Some people may not even know the types of credit cards available to them depending on their lifestyle.
That’s right!
Even though every credit card has the same purpose, some specific types of credit cards do exist.
Such cards allow the customers to get rewards depending on the types of purchases they make or other benefits.
Today, I will provide extensive information regarding credit cards and the proper way to utilize them.
When a credit card is not utilized properly, the chances are high that a person would have to face financial difficulties.
On the other hand, handling credit cards in the right way would even allow a person to take care of their financial aspects effectively. As most people might not need.
This article may seem like it contains all the jargon related to credit cards, yet I am writing this with the intention that even children can understand.
Because of that reason, I will cover each and every aspect of credit along with tips on how to use them properly.
When I am trying to mention some examples, I am mentioning the credit cards available in the United States.
This does not mean that I endorse them and neither do I have anything to say against them.
They’re just examples so that the reader can have a better understanding of the purpose each type of card serves.
Let us start by discussing the glossary related to credit cards so that you can have a better understanding.
Credit Cards
A credit card is a type of plastic card (sometimes metal) issued by a bank or any other financial institution.
These credit cards allow an individual to borrow funds they don’t have at a specific time so that they pay it back later.
The primary use of a credit card is to use it for making purchases at various types of places for acquiring goods and services.
What do the banks get in return for offering credit cards to their customers?
Well, banks charge a certain amount of interest for the money that has been borrowed by the customer using a credit card.
The interest is charged in the form of an Annual Percentage Rate, which goes by the name of APR.
This APR is generally higher compared to most other types of loans that a customer can avail of.
According to the law, a credit card issuer would have to allow a grace period of at least 21 days before they charge an APR.
Only the unpaid balances are charged with an APR, which is usually 30 days after the transaction has been made.
Hence, it is a great decision to pay off the debt in the grace period rather than miss the opportunity and pay interest.
This would also allow a person to make it a habit of paying their debts on time to avoid any unwanted situations.
Even after the grace period, some credit cards generally provide an introductory APR offer.
This introductory APR allows the customer to avoid paying the interest even after the grace period ends.
Apart from the introductory offer on credit cards, there are various features and benefits.
I am going to list all the benefits that can be acquired through a credit card while discussing the advantages and disadvantages of a credit card.
Any person can get their hands on a credit card after qualifying for certain criteria.
This criteria usually comprises of credit score of a person, their income, and some other documents.
A credit score is a number that determines the creditworthiness of a person, and people with a low score may not get a credit card.
If you want extensive information regarding the credit score and all the aspects related to it, click on the link below.
A detailed guide for understanding credit score
Having said that, even people with a low credit score can become eligible for certain types of credit cards.
We’ll get to that part in a few moments, and keeping all that aside, let us have a look at the advantages and disadvantages of a credit card.
Advantages and disadvantages of using credit cards
There are a lot of benefits and drawbacks to using credit cards and we will cover most of those. Let’s start with the advantages.
Talking bout’ the benefits… you can certainly handle your financial aspects with the help of a credit card.
Keeping the positive aspects aside, unless you handle the credit card properly, you’ll have to face financial difficulties that arise from having it.
Let’s talk a few things about the pros before we can talk about the drawbacks of having a credit card.
Pros
First of all, we all come against a situation where we have to deal with hardships because we can’t overcome them.
Even the richest of us have to face certain financial problems at some point in our lives that we cannot avoid.
— One major advantage of having a credit card is that we can avoid such problems with ease. This is because the funds in our credit cards can be utilized at the right time when we have access to it.
— If you are worried about the security that comes with a credit card, then think again because things have changed. These days, credit cards come with added security that you don’t have to worry about your funds.
If you still think again, you can always stop the access to contactless access and sleep over it.
— You can’t access a credit card? Well, nowadays (especially for people with a low credit score), credit cards have been made available.
However, you would have to face a few difficulties before acquiring it in such a way. That’s why it’s important to handle your credit score with utmost care.
If you are looking for information that’ll help you understand everything about credit scores that’ll make you improve them, click here.
— It is not every time that we carry the cash necessary for making all the big transactions in our everyday lives.
In such a time, a credit card will always prove to be helpful and make a deal to overcome such situations.
Cons
Enough about the benefits that come from using it, let us now have a quick peek at the cons of using one.
— Using a credit card will certainly help you in building your credit history, and at the same time, it will allow to things go south.
It helps things get better regarding your credit history, yet you should also remember that things could go wrong. If you don’t use it properly.
— Following that, one of the major disadvantages of using a credit card is that it comes with a lot of costs involved.
Not just the APRs, but there are additional costs such as balance transfer fees, cash advance fees, foreign transaction fees, and so on.
— The amount that you can utilize from a credit card would generally be dependent upon your creditworthiness.
This means the amount that you use for your purposes would depend on your creditworthiness.
— Unless you use your credit to its full potential, you will always be at a loss. I mean that about the payment you’re making and the benefits you’re losing for the amount you’re paying.
Finally, to talk a few aspects about the credit cards you’re using, there are some ground rules. This is strictly necessary if you are thinking of using it wisely.
Tips to use credit cards
Here are a set of ground rules that will allow any person to efficiently handle their credit card(s) while steering clear of the drawbacks.
First of all, it is very important to have a budget plan.
Why? Because credit cards allow you to spend out of your budget because you have cash available at your hand.
Make timely payments, and this is one of the most important things to keep in mind while using a credit card.
Unless you make timely payments, you’ll be subject to interest that’ll lead to unwanted debt.
Try to utilize your credit cards to make your bill payments, which will decrease the money available for you to spend. This will also reduce the card balance payments as you usually pay your bills every month.
How is it good?
By doing so, you can clear off your bills on time, and then by making timely payments, you will avoid most of the negative situations.
Having a higher credit utilization rate is extremely helpful if you want to improve your credit history.
Because of this reason, most people get two or three, or even more credit cards under their name.
What they don’t do is watch out for the different types of fees and costs that are associated with it.
For instance, some credit cards have an annual fee, which might be an extra cost if you don’t use your card to its full potential.
Another important aspect of having multiple credit cards is that you’ll have a higher spending capacity. I have seen many instances where people having more credit cards spend a lot on things that are not necessary for them.
You should remember that a credit card should be treated as a tool for emergency or advantageous purposes. Not something that will allow you to buy everything see and desire.
Furthermore, some cards offer great rewards and sign-up bonuses that will only be available when you complete a certain spending limit.
Make sure that this spending limit does not make you use your card for overspending or spending on things unnecessary.
With contactless payments, most people become victims of credit card fraud or scams.
Having a contactless payment facility is good but only up to a certain limit, and that’s why you should keep the limit for contactless payments to a minimum.
As soon as you spot unauthorized transactions made with your card, immediately block the card and call the relevant authorities.
Looking to avoid credit cards?
For becoming free of debt or changes in lifestyle or improving your financial situation, some people like to stop using their cards.
It is okay but you have to remember a few key points while trying to stop using your card.
Take some time and think again about how stopping credit card usage is going to affect your financial condition.
Decide whether it will have a positive outcome or a negative one if you suddenly stop using it.
Leave your cards a home, which will stop your temptation to overspend when you are in a shopping mall or a supermarket.
Closing your credit card account would also decrease your credit score temporarily because your credit utilization gets decreased.
Make sure you are okay with not using a credit card or applying for a new loan (or a card), especially when you decide to close your credit card account.
It is not rocket science to understand and get accustomed to living on a budget, which would definitely improve your financial situation.
Remember building your wealth is way better than flashing your costly belongings and getting into wealth.
Retirement, marriage, kids’ education, etc., can be extremely important aspects in a person’s life rather than a Lamborghini or a costly mansion.
That’s almost everything you needed to know about the general information that is associated with a credit card. Now, let us see different types of credit cards and the key information related to them.
Types of Credit Cards
Given below are different types of cards, which are classified based on their features as well as the rewards they offer.
Business Credit Cards
These are specifically designed for small to medium-range company owners to take care of their expenses.
With the help of these, business owners can keep their personal expenses separate from their business expenditures.
Business credit cards also come with a great range of rewards such as travel benefits, air miles, and so on.
For some business credit cards, even self-employed individuals may be eligible, yet that’s not the case for all of them.
While choosing a business card, you should be on the lookout for aspects and features like:
— Interest-free financing offers and their details.
— Rewards and how they can benefit you from your expenses.
— Fees and costs, and always try to choose one with low fees.
Some business credit cards even offer the added advantage of providing additional complimentary cards.
Secured Credit Cards
Usually, secured credit cards are backed by collateral, which can be bank accounts, fixed deposits, CDs (certificates of deposit), etc.
When the cardholder defaults on their loan, the money present within their bank account would be taken away by the lender.
Why would someone risk their hard-earned money and earn such a type of credit card?
Well, two major advantages come with secured credit cards. The primary benefit is that you can become eligible for a secured credit card even when you do not have a higher credit score.
This is one of the most commonly seen practices among individuals who try to improve their credit score even when they aren’t eligible for a loan.
The second advantage of a secured credit card is that it allows to you make timely payments.
Why? Well, people would not want to throw away their savings or deposits just because of untimely payments.
This, in turn, creates a sense of responsibility among such people and motivates them.
In most cases, secured credit cards do not have a requirement for credit score-related eligibility criteria.
You may not even get access to rewards, and simultaneously, the interest rates are comparatively high.
Making on-time payments, keeping a good credit utilization rate, and not spending too much can definitely help build a credit score.
It is said to take as little as six months to one year to build your credit score with the help of a secured credit card or a secured loan.
If you are looking for secured loans instead, the information given below can come in handy.
Student Credit Cards
Individuals who are young might lack the necessary payment history while acquiring a credit card.
In such a scenario, a student credit card will come in and save the day. There are specifically designed for students who want to build their credit for their future.
Mostly, these credit cards do not offer one too many rewards and have a lower credit limit.
As the name suggests, you don’t necessarily need to be a college student to qualify for a student credit card (in some cases).
Yet, there can be certain eligibility requirements like age, and in some cases, you might definitely need to be a student. This depends on the lender.
One other requirement that most card providers impose for this card is the necessity for a co-signer.
This means somebody should vouch for you regarding your credit card, which is called a co-signer.
When you fall back on making the payments, not only your’s but the co-signer’s credit history would also be impacted.
Another scenario is where you are an authorized user, which means someone allows you to use a credit card based on their creditworthiness.
College credit cards can turn out to affect your creditworthiness a lot because that is not an age at which someone would be financially responsible (although it should be).
Building your credit score from that age would allow you to take things into your hands financially.
As with every other credit card, the rules are very simple. Pay off your debt on time, don’t buy what you can’t afford, and don’t open too many accounts.
By using your college credit card properly, you can easily build your credit score which opens many gateways in the future.
Rewards Credit Cards
These credit cards usually offer different types of rewards, which can be in the form of:
— Cashback
— Air miles
— Bonus points (can be redeemed)
Rewards credit cards, if used properly can be highly advantageous depending on the card you choose. Let’s talk about why I said “properly” and what’s the disadvantage of don’t use it properly.
For example, assume choosing a rewards credit card that charges more than $500 as an annual fee.
If you were not able to meet the requirements for earning rewards, then you would definitely be at a loss.
At the same time, assume choosing a card that charges no annual fee and offers you a welcome bonus of $500.
Now, imagine that it also came with a cashback of 2% on all purchases and 5% on purchases that fall under your category of spending.
That makes the card extremely beneficial, and that’s why it is advantageous to have a rewards card and use it properly.
Examples have been stated as a reference and do not contain details of a credit card that has the exact same benefits.
As I said before, the spending must be done in what you generally spend, and do not overspend because of becoming eligible for any of the rewards.
Travel Rewards Credit Cards
Also known as Travel Cards or Air Miles Cards, these offer benefits related to travel (specifically flight benefits).
Usually, an individual can only get access to the rewards offered by a travel rewards card when the purchases have been made related to air travel.
People who travel a lot can mostly benefit from these cards, and some cards even offer free flights or large discounts on flight tickets.
Cashback Credit Cards
The name itself makes it obvious that these credit cards offer rewards related to cashback.
However, the amount of cashback that can be earned might be subject to certain terms.
For instance, some cashback cards offer higher cashback only on certain qualifying purchases, and 1 or 2% cashback on other purchases.
On the other hand, some cards might even place limits on how much cashback can be earned within a particular year.
Hotel Credit Cards
Like travel cards offer travel rewards, hotel credit cards offer rewards related to hotel stays.
Some cards might even offer rewards as lucrative as hotel stays (up to a week) in some of the finest hotels in the world.
Usually, travel credit cards and hotel cards, and most other rewards cards, are co-branded cards.
This means they are in alliance with another business related to travel, hotels, etc., to offer such benefits.
You should understand the fact that such rewards cards are usually designed in such a way that would positively impact the business of the co-brand owner.
That is why, while selecting a rewards card, select the one that falls under your needs and not because it offers a higher reward.
Hotel credit cards are also advantageous for people who usually spend a lot of money at hotels.
Balance Transfer Credit Cards
Balance transfer cards allow individuals to transfer their credit card balance from one card to another card without any interest or low interest.
This is usually done in order to make a timely payment on another card without having to accrue additional interest.
Remember that there is a certain amount of risk involved with balance transfer cards. Usually, when you pay off existing debt with the available balance on this card, you will be offered a 0% rate for a certain period of time.
However, after some time, the balance transfers are also charged with an interest rate that’s typically higher.
Therefore, you should not get into such short-term adjustments unless you are sure about paying back on time.
Bottom Line
A vast majority of this information was focused on all the essential topics related to credit cards.
This means this contains all the necessary aspects you need to know for utilizing a credit card wisely.
Not using a credit card properly would not impact a person’s credit score, but it would also affect their financial situation by leading to a cycle of debt.
Therefore, it is important to stay focused on how to use them wisely and not to get too carried away that you will become a victim of overspending.
Apart from the cards I’ve mentioned in this article, there might also be some other types of cards. Although the names might sound different, most of the cards have the same functionality.
That being said, I strongly hope that the information provided in this post was helpful to you.
If you are looking for an efficient financial professional that offers high-net-worth wealth management services or investment services, then you are in the right place.
I happen to offer the best-in-class financial services to several clients located all over the world.
Do you want to find out whether or not you can benefit from the services that I offer, feel free to get in touch with me.
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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.
