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[ November 2004 ]
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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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