Credit cards are financial tools that can be extremely beneficial and convenient or can make you end up in debt, depending on your know-how and usage skills. Several types of credit cards are available through financial institutions, but you must understand the terms, benefits, and credit limits before getting one.
Why should you apply for a credit card?
We all might have encountered financial experts repeatedly reminding us how we should refrain from using credit cards excessively. Many use credit cards imprudently, because of which they might end up accumulating massive debts. On the contrary, using a credit card responsibly can prove much more advantageous than using a debit card. Here are a few benefits of credit cards to help you understand why applying for a credit card might help improve your financial standing:
- Cashback
The idea behind cashback cards is reasonably straightforward. If you use the credit card to make a payment, you'll get a cashback rebate. This started with being equivalent to 1% of the purchase amount, but the concept grew and matured over time. Now, many cashback cards offer a cashback benefit of 2-3%, and some even provide a rebate as high as 6% on select purchases. - Bonuses
A brand new card comes with a bonus. Usually, applicants with excellent or good credit tend to get their credit card applications approved, and these approvals bring in a massive bonus worth $150 or even higher at times. - Reward points
Reward point cards help cardholders get a minimum of one reward point for every dollar spent. Some cards also help you bag reward points for specific categories like payments for gasoline and groceries, at restaurants, and such. When you reach your reward threshold, you can redeem the accumulated points for gift cards, travel, merchandise, or at restaurants, online portals, and more. - Frequent flyer miles
One of the first credit card benefits, this benefit was initiated by American Airlines in collaboration with Citibank in the 1980s. The purpose was to give customers a unique way to earn rewards even when they weren't flying. Today, for every national or international airline, at least one dedicated credit card offers this benefit. - Grace period
Making a payment with your debit card means the money is deducted from your bank account immediately. On the other hand, paying with your credit card means the money is still there in your checking account until you repay the dues accumulated as a bill for the card. The grace period proves beneficial in the long run. - Insurance
Usually, credit cards come with a bunch of insurance protections that many cardholders don't even realize. Some of the protections you get with credit cards are travel insurance, rental car insurance, and a product warranty, which is more than the manufacturer's warranty in most cases. These coverages can bring you massive benefits in the long run, without even requiring you to pay any extra charges. - Global acceptance
When traveling to a foreign land, your debit card wouldn't be accepted, so having a credit card will certainly help. Regardless of how reputed your bank is at a global level, debit card payments wouldn't be accepted in most foreign countries. So, you should get at least one credit card if you are a frequent traveler. - Credit cards help you build credit
If you have zero credit history or want to improve your credit score, become a credit card user. That being said, avoid impulse shopping and maxing out your credit card limit; instead, use your credit card responsibly to enjoy the benefits in the long run. All credit card companies report your payments to authenticated credit bureaus, and your credit score is affected by whether you clear your dues on time. On the other hand, debit card payments do not show on your credit report, so they do not improve or even help you build your credit. So, if you wish to apply for a loan in the future, opt for responsible use of credit cards over making debit card payments.
If you’re planning to apply for a credit card, read on to understand a few factors you must be aware of beforehand.
What are the different types of credit cards?
Mentioned here are some of the types of credit cards you can choose from. Ensure that you do your research and make an informed decision after evaluating the pros and cons of each of your options:
- Standard or plain vanilla credit card
A basic or plain vanilla credit card does not offer any rewards or frills. It comes with relatively easier-to-understand terms of use, so if you want a card that isn't complicated, or if you do not want any specific benefits through payments, you can opt for this card. It lets you have a revolving balance up to a stipulated credit limit, so the credit is consumed whenever you make a purchase, and you have to repay your dues to get more credit. Also, a charge is applicable to the unpaid dues at the end of the month, which is a rule that applies to every credit card. Besides, you must make a minimum payment up until your due date to avoid late payment fees or penalties. - Charge cards
Charge cards come with no preset spending limit, but you must pay out the balances in full toward the end of each month. Also, there's never a minimum payment or finance charge, but a late payment attracts penalties, restrictions, or even card cancellation as the dues must be cleared every month. The consequences of late payment would be mentioned in the agreement. - Rewards credit cards
A rewards credit card will fetch you rewards on all your purchases. You can opt from three types of rewards cards: travel rewards cards, cashback rewards cards, and points rewards cards. Many people opt for cashback rewards cards as they are much more flexible than the other two variants. The points accumulated with a points rewards card can be redeemed for merchandise or cash, while a travel rewards card can fetch you travel perks, hotel stays, and free flights, making it ideal for you if you’re a frequent traveler. - Subprime credit cards
If you have poor credit and are finding it difficult to get your credit card application approved, these credit cards are for you. They are specifically designed for people with a poor credit score or history, but they usually charge massive fees and a high interest rate. The only positive side is that approval for a subprime credit card is quicker. That being said, the terms of the card can be confusing, so ensure that you clear any doubts with the issuer beforehand. - Secured credit cards
Another type of credit card that people with poor credit can opt for, these cards require a refundable security deposit that the issuer holds as collateral in case you fail to clear the dues. You need to make this cash deposit when you open the account, and your credit limit will be equivalent to the amount you deposit. The advantage here is that responsible usage of a secured credit card can improve your credit score, and you’ll eventually get your security deposit back too. - Balance transfer credit cards
A balance transfer card gives you a low introductory rate on balance transfers for a specific period, so it’s a viable option for anyone who wishes to save instead of paying high interest on their existing card. That being said, you must know that the rates of a balance transfer card are variable and may even be 0% at times. Also, these cards have qualifiers like fees on each transaction made. The lower the promotion rate, the higher the promotional period would be, so these terms make for the best balance transfer credit cards. To qualify for these cards, you must have a good credit history and/or score. - Student credit cards
These cards are for college-going students, and banks offer these cards with due understanding that young adults do not usually have a credit history. So, if you’re a first-time credit card applicant, you can get a student credit card more easily than the other types.
A good thing about these credit cards is that they always have additional perks like a low interest rate and good rewards. That being said, these benefits shouldn't be the determining features when you’re seeking a student credit card. You must be enrolled at an authenticated university in their 4-year program to be eligible for this credit card. - Business credit cards
These cards are for business use only, and business owners can keep their personal and business transactions separate with the help of these cards. The issuer will examine your credit history before issuing a business credit card. - Limited-purpose credit cards
These cards can be used at only certain locations, and they have a minimum payment and finance charge. Gas credit cards or store credit cards are some examples of limited-purpose credit cards.
How can you choose the right credit card?
Finding and getting the right credit card also requires you to meet a few prerequisites:
Check your credit score
You should always check and know your credit score. If your credit score is good, you'll be eligible for several benefits like low interest rates and a reasonable credit limit. Besides, knowing your credit score helps you apply for a suitable credit card and avoid unnecessary hard inquiries, which can also bring your score down.
Analyze and find the right type of credit card
As mentioned earlier, a bunch of different types of credit cards are available, so you must understand which one best suits your requirements. Determine why you’re applying for a credit card to help you find the right one that meets your needs.
Narrow down your choices by asking the issuer the right questions
After listing down the top credit card types that you’re interested in applying for, you need to pick one. To do this, you can ask yourself a bunch of questions.
For secured or student cards:
- Will it help you improve your credit score?
- What would be the annual cost and is it worth it?
- Will it help you update to a better card later?
For 0% Annual Percentage Rate (APR), low-interest, or balance transfer cards:
- What is the ongoing APR?
- What is the period for 0% APR?
- What is the balance transfer policy on the card?
- Will you get any rewards, benefits, or cashback on the card?
For cashback, travel, or rewards cards:
- How will you be spending the money?
- Are the terms of the card complicated?
- Will you be able to earn enough rewards, and what will be the worth of these rewards?
Opt for a card that delivers the maximum overall worth
If you found your perfect card in step 3, excellent! But if not, this step is essential. Once you’ve narrowed down your choices, you will mostly have to choose between two or three almost similar cards, which can get a little tricky. For this, you need to scrutinize the differences between the chosen cards and measure each of these differences. This can help you rule out the cards that are less profitable than the others.
