Different Types of Credit Cards (Balance Transfer, Rewards, etc) Explained

Types of Credit Cards

Credit cards are forms of payment that allow you to make a purchase and pay it off over time — as long as the amount is under your preset spending limit. There are several different types of credit cards to choose from that can fit all types of financial needs and lifestyles.

Keep in mind that exact terms for each type of card will vary depending on the bank that backs the card and your credit history. It is best to compare terms from several credit card issuers before applying.

Below, we detail the major types of credit cards, as well as their features and potential drawbacks, to help you determine which type of card can best fit your needs.

Balance Transfer Credit Cards

With a balance transfer credit card, users can transfer their credit card debt from an existing card (even one with a high interest rate) to a new credit card. These cards offer a low or 0% APR on balance transfers, so they can be a good option for users who want additional time to pay off large amounts of debt without accruing interest.

Features

These cards offer 0% APR on the transferred amount for a set period, typically from around 12 to 21 months. Also, these cards usually offer 0% APR on new purchases during an introductory period of about 12 to 18 months after the account opens. As long as you pay the monthly minimum payment during the introductory period, you will not incur interest on the charges. Most balance transfer cards do not come with annual fees.

Potential Drawbacks

To take advantage of the 0% APR, you must pay off the entire balance before the end of the introductory period. Users who do not pay off the balance at the end of the introductory period will incur high interest charges. Additionally, balance transfer cards typically charge a fee to transfer a balance; fees are usually 3% of the balance or $30, whichever is higher.

Cash Back Credit Cards

Cash back credit cards give you back a percentage of your purchase in the form of a cash back credit, which you can then redeem for either cash or statement credit, depending on the terms of the card. You can compare percentages from each lender and individual card to find the best deal. Cash back credit cards can be a good option for users who want to earn money back on both everyday and large purchases.

Features

Cash back cardholders immediately earn cash back credits after making a purchase and can apply these credits as early as the next purchase. You also have the option to save cash back credits for a longer period of time, resulting in a larger payout or statement credit. Additionally, these cards typically carry no annual fees.

Some cash back cards offer an introductory cash back credit amount when you charge a certain amount during a set promotional period, which can be as long as one year. However, there are usually limits on how much you can earn during this period.

Potential Drawbacks

Many cash back cards only offer cash back on specific categories, and these categories often rotate quarterly. Depending on what types of purchases you use a credit card for, there may be some quarters when you earn little to no cash back.

Rewards Credit Cards

Rewards cards earn you a certain amount of points or travel miles with each purchase. You can compare cards by looking at the percentage each issuer or individual card uses to credit your account with rewards points.

Some rewards credit cards are co-branded with an issuer and a retailer or travel company. Co-branded cards are usually valid anywhere the issuer’s cards are accepted (as previously reported); however, some store credit cards come with discounts, rewards, or cash back programs that you can apply toward purchases at that particular retailer.

For example, the Marriott Bonvoy Credit Card from Chase allows cardholders to redeem points for stays at Marriott hotels only, but also allows them to redeem travel points with a large number of airlines and car rental companies.

Rewards cards work well for users who are frequent travelers and want to receive travel discounts or travel for free using rewards or miles. They also work well for people who use their credit cards for everyday purchases and want to earn rewards for this spending.

Features

Some cards earn a higher percentage of points in certain categories of purchases, such as fuel or groceries, while others offer the same percentage across all categories. After accumulating points through purchases, you can redeem those points for travel or products such as gift cards.

Most credit cards with robust rewards programs will also offer sign-up bonus offers. Cards may offer a one-time bonus — typically anywhere from 20,000 to 60,000 points (equating to about $200 to $600) — when you open an account. To get the bonus, you have to charge a certain amount on the card within a certain period after opening the account, usually two to four months.

Some credit card companies also have agreements with select airline mileage programs, so you can transfer your travel rewards points from your credit card account to your airline mileage account. For example, American Express card members can transfer their rewards points to British Airways, Delta, and several other airline mileage programs.

Potential Drawbacks

These cards typically (though not always) come with annual fees. Generally, the easier it is to accumulate points, and the more perks a card offers, the higher the annual fee. For example, the Chase Sapphire Preferred Card annual fee is $95 — but the annual fee for the Chase Sapphire Reserve Card, which offers a higher percentage of points more perks, is $550.

Secured Credit Cards

Secured credit cards are designed for people who have poor credit or minimal credit history and do not qualify for a regular credit card. To get a secured credit card, you must give the credit card company a refundable security deposit. The card issuer holds the deposit as collateral until you close the account.

This deposit makes it less risky for banks to issue credit cards to holders who are either inexperienced or have low credit scores or a history of payment issues. If the cardholder doesn’t keep the account in good standing, the bank keeps the security deposit.

Features

Typically, secured cards do not require applicants to have a credit history, and you can use a secured card anywhere that accepts regular credit cards. Most secured credit card issuers will help users build their credit history by reporting usage to the major credit bureaus.

Many secured credit cards do not come with annual fees and those that do typically keep the fees low, ranging from about $29 to $49.

Potential Drawbacks

Secured cards typically have lower limits than other credit cards because the credit limit is generally tied to the security deposit amount, preventing users from charging more than they are able to repay. (For example, if you pay a $1,000 security deposit, your credit limit will be $1,000.)

Student Credit Cards

Many lenders offer student credit cards, which help students build a credit history while they are still in school, and while they may not have a steady income.

Features

Since student credit cards are designed for younger users who do not yet have an established credit history, student cards typically do not have strict qualifications for approval, other than student status and proof of income. Student credit cards typically have lower APRs than typical credit cards, and they come with low or no annual fees.

Some student credit cards also offer ways for users to earn and redeem points for things like travel, gift cards, merchandise, and cash redemption options. For example, the Bank of America Travel Rewards Credit Card for Students is geared toward U.S. students studying or traveling abroad. It offers no annual fee, no foreign transaction fees, and the ability to earn 1.5 points for every dollar spent.

Potential Drawbacks

Student credit cards typically have lower spending limits than other types of credit cards, since lenders do not want to take on too much risk by lending large amounts to students with little to no reliable credit history.

Additionally, as the name implies, these credit cards are only available to students, and most lenders will require proof of enrollment in a two- or four-year college or university as part of the application process.

Business Credit Cards

Business credit cards are for users who own a business of any size. Generally, to open a business card, you will need to prove that you own a business by providing an Employer Identification Number (EIN).

Features

Many business credit cards come with perks such as travel rewards and cash back. Users accumulate points to use for travel or statement credits. Users can also benefit from large reward signup bonuses.

Business cards may also come with more payment flexibility than other cards, such as cash back incentives for early repayments and interest-free payment extensions, with some restrictions.

Additionally, many business cards come with low or no introductory APR offers — typically for the first 12 months — which can allow you to make large business purchases without worrying about accruing interest for up to a year.

Potential Drawbacks

Most business cards charge an annual fee, but some cards waive it for the first year after account opening.

Additional Information

Some cards offer a combination of the above features. For example, the American Express Cash Magnet Card offers a $150 statement credit, cash back on purchases, 0% APR on balance transfers, as well as 0% APR on new purchases for the first 15 months after account opening.

Also, if you are unable to qualify for a credit card on your own, virtually all credit card issuers — even for student cards — will allow you to bring on a cosigner to boost your creditworthiness. Keep in mind that a cosigner shares the responsibility of making sure that payments are on time, and negative activity on the credit card will affect their credit score as well.

Credit Card Alternatives

If you do not want to open a traditional credit card, or if you are unable to qualify for one, there are still some options that may work for you and allow you to make large purchases when needed while building your credit.

Charge Cards

Charge cards work very similarly to credit cards, except they do not have a formal preset spending limit and they require you to pay the entire balance every month. These cards are best for users who desire the flexibility to make large purchases as needed but who are also in the financial position to pay them off every month.

Features

Charge cards have no formal spending limits, so users are free to make large purchases when needed. Charge cards are typically beneficial for business owners who need to manage cash flow over short periods of time and who may need to make large business purchases.

Some charge cards allow users to carry a balance on eligible purchases and make minimum payments; one example of this is the American Express “Pay Over Time” feature.

Potential Drawbacks

Although charge cards do not have a preset spending limit, they do impose informal spending limits. The issuer must still approve any charges, and purchasing power can change over time based on factors like creditworthiness or payment history.

Additionally, since charge cards typically require cardholders to pay the full balance every month and do not pay interest to the issuer, most charge cards come with significant late fees and annual fees.

Prepaid Cards

Prepaid cards are similar to charge cards, but the user must load money onto the card account before making any purchases. This protects credit card companies and allows users to “withdraw” money, similar to a debit card. Prepaid cards are different from debit cards, however, since they do not require you to open a bank account.

Features

Since prepaid card users cannot spend more than the amount of cash they load onto the card, prepaid cards are beneficial for users who have trouble controlling their credit card spending. They are also accessible to users with low credit scores. Carrying a prepaid card can be safer and more convenient than carrying large amounts of cash.

Potential Drawbacks

Prepaid cards typically come with fees. These can include activation fees, ATM fees, and monthly or annual fees.

In Summary

There are plenty of options to choose from when searching for a credit card to fit your needs. The different types of credit cards include balance transfer cards, business cards, cash back cards. rewards cards, secured cards, and student cards; some cards fall into multiple categories. If you do not want or are unable to qualify for a traditional credit card, you can choose between different charge cards and prepaid card options, or bring on a cosigner.

Keep in mind that each lender and card comes with its own terms. Before applying, you should evaluate several options based on your credit history, your expected credit card use, your existing debt, and what types of benefits are most important to you.

For more on credit cards, check out our articles about credit cards that preapprove, instant approval credit cards, and credit cards with low credit lines.