Learn the Differences Between Credit Cards

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Small rectangles of plastic known as credit cards are universal icons of the exchange of goods and services. They are preferred over cash by businesses and consumers for buying practically any and everything imaginable. Although popular, not all cardholders or merchants know the differences between credit cards or their best use.

Well over one billion credit cards exist in the U.S. alone. While once a status symbol, they are now necessary to conduct certain financial transactions like online purchases, making travel reservations or renting a car. That said, having one credit card is not enough to maintain financial stability and that’s why it’s incredibly important to know the various types of cards and how to use them. 

Topics:

– Credit Card Issuers and Payment Networks

– Three Types of Credit Cards

– How Many Credit Cards to Carry

– Credit Card Agreements

Credit Card Issuers and Payment Networks

The bank, credit union or another establishment that provides a credit card to the consumer is known as the issuer. The issuer is often a large bank or financial establishment but can also be a local or regional bank. Defining card issuers and their functions helps consumers understand their credit relationships better and get more from their accounts. 

Some responsibilities of credit card issuers are to:

  • review and approve (or decline) applications
  • set credit limits
  • set interest rates and fees
  • mail and activate cards
  • maintain accounts
  • offer card rewards and benefits
  • prepare statements
  • process payments
  • report payment history to credit bureaus

The issuer also assumes the risk of default by the cardholder. They pocket any profits made from the use of the card. Issuers also get merchant fees, which are a percentage of sales prices from stores that accept their cards as payment.

 

Frequently, retail establishments, hotels, auto dealers, and many other businesses offer customers to apply for one of “their” credit cards. The shiny card comes in the mail with prominent branding of the business; making it easy for the consumer to proudly say he has a [insert brand name] card.  This assumption can be confusing.

Hotels and airlines don’t actually issue credit cards. Even though the logo and name is displayed on the front, the issuer of the card can be found on the back in small print. The cardholder must get in touch with the real issuer if there is a problem with the card.

A payment network is the company that serves as the middleman to process payments made to merchants. The two most common payment networks are Visa and MasterCard. Payment networks also play a part in administering some cardholder benefits on behalf of the credit card issuer, such as price protection or warranty coverage.

Three Types of Credit Cards

Credit cards allow users to make purchases for goods or services and pay later. They are considered unsecured credit, which means that repayment is not guaranteed by collateral such as a home or vehicle. They can be convenient but they do tend to have higher interest rates than other types of credit. 

 

Credit card payments for purchases (plus interest) are due each month. Cardholders can pay the entire balance or a part of the balance that is at least the minimum payment. The remaining balance is rolled over into the next month – with interest, of course. Although they all work pretty much the same, credit cards are not exactly alike.  Three categories of credit cards are:

  • rewards cards
  • low interest
  • secured credit cards

Rewards cards

Rewards cards work best for people that pay their balances in full every month since that’s the best way to earn more rewards. Low interest and balance transfer cards are a fit for consumers that have other credit card debt. Secured credit cards are a means for people with bad credit to get a card and also build credit.

 

With rewards credit cards cardholders earn rewards on purchases. Rewards are either paid at a flat rate or as an extra bonus for buying goods in specific categories. Rewards can be money, gift cards, airline miles or other perks.

Low interest cards

Low interest cards are ideal for people who carry balances from month to month. They are available with ongoing rates or zero-to-low APR for an introductory period. Low interest cards can be balance transfer credit cards. These cards let people move high interest credit card debt to a new card and pay it off interest free within a time period (for a transfer fee). 

Secured credit cards

Secured credit cards are designed for people with poor or no credit. They are secured by a bank deposit which sets the credit limit. Timely payment can eventually boost the cardholder’s credit score. The low risk factor makes approval for this card easy for most consumers.

How Many Different Credit Cards to Carry

While there is no perfect number of cards consumers should have, general guidelines can be used to create a credit profile to meet individual financial needs. Some consumers may want to consider having at least two cards, one in each card network (MasterCard and Visa). This avoids problems in case one type of card is not accepted, especially when traveling.

How many cards to carry is a personal choice. More important than the number of cards is the impact they have on the credit score. Three factors to consider when choosing credit cards:

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    Apply for cards that offer more rewards and incentives.

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    Choose cards with the lowest interest rates.

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    Always maintain low credit card utilization regardless of how many card accounts are open. Average balances across all cards should be no more than 10% of the total credit card limit.

One of the biggest mistakes cardholders make is not getting a true understanding of the interest rates they are charged. Rates can change quickly, especially with promotional campaigns. A day past the promotional period can cost thousands of dollars over time. For these and other reasons it is important to read the fine print in the agreement before signing.

Credit Card Agreements

Once a credit card agreement is signed, it becomes a legally binding contract. Too many consumers find something in the contract they don’t like after they have not only signed, but used the card to make purchases. Reading contract language is definitely not entertaining but it is necessary to avoid tons of trouble later. 

Cardholders should pay careful attention to these terms in their credit agreement:

Almost every creditor reserves the right to change their terms. Usually, they will send a notice of changes that are being made to the original terms, which should be read carefully. Consumers should avoid any credit card that charges non-standard fees and find out if there are any fees if the card is not used.

Consumers should also become familiar with their credit rights. Fair treatment, truth in lending, and other credit practices are regulated by governments. Individuals can report creditors if they have been the victim of a violation. Like all financial issues, asking questions and performing due diligence ahead of commitment is key. Knowing the differences between credit cards and their uses goes a long way toward creating a strong credit profile. 

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Sheila Kay

Sheila Kay is an author, ghostwriter and editor residing in the Atlanta, GA area. Among her favorite writing genres are creative nonfiction, self-improvement, and finances. Her first published book, PTSD and the Undefeated Me, is a memoir which has been a stepping stone to her involvement with mental health advocacy for military and civilian men and women. She is currently working on the first fiction novel to be published under her name. For more information or to purchase her books, visit Sheila’s Author Page on Amazon.com.

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