Applying for a credit card can be a scary process. The greatest challenge comes not from making the wrong decision, but from being unaware of all the information.
Then you must take into consideration all the different credit card companies and all the different rewards they offer. Choosing a credit card can quickly become overwhelming.
Thankfully, when looking at credit cards from the top down, it quickly becomes easy to see that there are only three broad categories to understand.
The three different categories are rewards credit cards, low interest and balance transfer cards, and credit-building cards. While it might be easy to wrap your head around these three broad categories, it is also important to understand that there is fluidity and flexibility between these three groups.
In other words, one card can belong to two different groups at the same time.
The first category is the rewards credit cards. The advantage of having a rewards credit card is that with every purchase you will earn something back. There are two different types of rewards credit cards. The first type of rewards credit card is a cash-back card.
Cash-back cards earn back a percentage of what you spend on expenses. If you have a travel bug, you may be more interested in a travel rewards credit card. With a travel rewards credit card you will earn miles or points for purchases you make.
Next on the list are low interest and balance transfer cards. Low-interest cards do exactly as they advertise by offering 0% APR on purchases for a limited time, typically up to 18 months.
To most efficiently take advantage of a low-interest credit card the best time to sign up and use one would be when you wish to make a large purchase and want to pay it back over time, without the hassle and worry of interest.
Additionally, with low-interest cards, if you are willing to give up the typical 0% APR introductory period you can instead get a card that has lower than average rates overall.
Balance transfer cards are similar to low-interest cards, with one slight difference. Low-interest cards don’t assume that you’ll be carrying a balance, whether you may or not be. Balance transfer cards, on the other hand, assume that you’ll be carrying over some already accumulated high-interest credit card debt.
A balance transfer card will assist you in managing that debt. The best balance transfer cards let you secure an introductory 0% APR for a period typically between 15 and 21 months, which can give you a nice break from paying interest charges while you focus on paying down your debt.
Most cards require you to pay an upfront balance transfer fee of 3% or 5%. There are some credit cards with no balance transfer fee.
Still, even after taking the balance transfer fee into consideration, you could save a significant sum of money on interest during the card’s introductory APR offer.
A majority of credit cards are unsecured, meaning you don’t have to put down any collateral. With secured credit cards, on the other hand, you are required to put down a cash deposit in order to secure a small line of credit.
This is usually for a similar amount. For example, you might sign up for a secured credit card and put down a $500 initial deposit in order to receive a $500 line of credit. The one-time deposit, also known as the credit limit, in this case, can be as low as $49.
While putting down collateral may not seem ideal, secured credit cards are the easiest type of credit card to get approved for.
They are often helpful when you need to build credit from scratch, or want to fix your credit after a financial setback.