Credit Cards

Credit Cards — An Overview

Credit cards made their first appearance in 1951. In that year the Franklin National Bank of New York began to issue a card to select loan customers for making retail purchases from participating businesses. The merchants would hold onto a sales slip with customer details and the bank would credit the merchant with the amount of the purchase, less a service fee. American Express® began offering credit cards for entertainment and travel purchases in 1958. Universal credit cards followed, issued by bank card associations when Bank of America began to partner with other banks to issue credit cards under a license agreement. Today, credit cards can be obtained from virtually any bank or credit union as well as from sports teams, retail stores and charities.

Why Use A Credit Card?

The advantages of credit cards include being able to build up a good credit history, which can help you obtain financing at lower interest rates in the future, convenience (not having to carry cash or checks), the freedom to purchase high ticket items and pay them off over time, the ability to order via Internet or telephone, and the ability to rent a car. Credit cards also offer purchase protection should you have a dispute with a merchant over goods or services ordered.

Types of Credit Cards

Credit cards vary in a number of ways. There are numerous different types of credit cards, including:

Standard Credit Card

Your basic credit card allows you to make purchases anywhere and pay your bill after a certain grace period. Often, a minimum payment of three percent of your statement balance is required on your statement due date to keep your account in good standing without incurring late payment charges or interest charges. Typical interest rates range between 12 to 24%.

Rewards Credit Card

Just for using your credit card, you can earn points that can be redeemed for retail rewards (gift cards), gasoline, air miles, travel (hotel, restaurant), office equipment or even cash (cashback). Usually, you receive a few thousand points for signing up with the program and one point for every dollar spent with the card. However, rewards credit cards generally require better than average credit and usually charge an annual fee for the privilege of getting rewards. Unless you are a heavy credit card spender and do not carry a balance, you’re likely better off obtaining a credit card without an annual fee and with a low interest rate, then using the money you save on whatever you like rather than selecting from a limited menu of participating businesses that have relationships with your credit lender.

Business Credit Card

Business credit cards come in as many flavors as regular credit cards: cashback, rewards, air miles, low APR, etc. They also convey unique benefits such as higher credit limits, the ability to issue multiple cards on one account, expense management and the simplicity of keeping business expenses separate from personal purchases.

Student Credit Card

To build up a good credit history, it’s in a student’s best interest to get a credit card while in college — provided they use the card for necessities and spend within their ability to pay each month. Most student credit cards do not charge an annual fee and have reasonable interest rates, despite the lack of credit history. Some also offer rewards or low introductory APRs.

Balance Transfer Credit Card

Balance transfer credit cards allow credit card holders to transfer a higher interest balance to a lower (zero to ten percent) interest rate card. The lower interest rate applies for a limited time, usually three months to one year, after which the interest rate can jump as high as 20 percent or more. A balance transfer service charge of two percent may also apply. Terms and conditions can vary greatly between cards. For example, there may be full interest charged without a grace period on new purchases or cash advances during the introductory period.

Bad Credit / Credit Repair Credit Card

For those with poor credit scores, there are lenders who are willing to offer credit cards with high interest rates and low spending limits to help the cardholders slowly rebuild good credit histories. However, these lenders often charge enormous fees simply to open an account. It’s not unusual for such a card to charge $250 to open an account, leaving less than $100 of available credit for actual use.

Secured Credit Card

For those with poor credit, secured credit cards are an option. Secured credit cards require collateral such as a security deposit of equal or greater value to the credit limit for approval. This could be any asset of value, like a boat, car, stocks or jewelry.

Prepaid Credit Card

Prepaid credit cards are essentially debit cards, as you must load them up with funds before you may use them. However, these are good credit cards for those who want to avoid racking up credit card debt, or who want to provide a bit of money for a family member to use. Most prepaid credit cards do not charge financing fees, but may charge monthly fees or start-up fees as well as overdrawn account and ATM charges.

Low Interest Credit Card

Low interest credit cards offer an introductory APR (annual percentage rate) that is either fixed (not necessarily for the life of the account, as credit lenders may change or adjust interest rates at will) or which may jump to a higher interest rate after a period of time (whether or not it is a balance transfer card or a regular card with a low introductory rate). Most banks and credit unions offer a variety of credit card products. You may be entitled to a lower interest rate card simply by calling your lender and requesting a switch; however, keep in mind that you will likely pay an annual fee of $25 to $50. Unless the interest you expect to save (i.e., you’re carrying high unpaid balances every month) exceeds the amount of your annual fee, you shouldn’t take a low interest credit card over a higher interest, no fee credit card.

Charity / Affinity Credit Card

Charity credit cards or affinity credit cards are like rewards cards except that your rewards points go towards the good cause associated with the card. However, the amount you need to spend to accumulate enough points to make a nice donation can be very high if the card only donates one percent. It may be more philanthropic to reduce your credit card spending in favor of making charitable donations that are tax deductible, as affinity credit card contributions do not qualify for tax credits.

Authored by Linda Bustos, CreditorWeb. Original article published 29 September 2007, copyright Ten Spider Enterprises & Linda Bustos.

Follow links to the right to learn more about types of credit cards, advantages of credit cards and precautions for using a credit card. At the left margin, Related Links address topics of interest pertaining to personal finance and money-saving resources. View the Personal Finance SiteMap for a complete list of personal finance and financial services topics.

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