Choosing the right credit card is a lot like choosing the right pet: each has its selling points and may look quite appealing until you get it home. Therefore, it is important to choose a card you can live with for a long period. Even if there is no annual fee, all credit cards carry interest fees and other penalties if certain conditions and obligations are not met, so beware of claims to the contrary.
There are only a handful of credit card types you need be familiar with before choosing a card that is right for you. These include:
Standard Credit Cards: Most people start their credit histories by acquiring that first standard credit card. Standard credit cards offer a revolving balance up to a predetermined credit limit, with a minimum payment due on the balance at the end of month. Late fees are often charged to the account if the minimum payment is not made on time. Standard credit cards are the easiest cards to understand; they offer no bonuses or rewards, just the ability of the cardholder to purchase goods and services within a certain credit limit at a predetermined interest fee.
Premium Credit Cards: These are the cards that have incentives and other enticing benefits associated with them. Often marketed as Gold or Platinum cards, they are generally associated with rewards point programs, travel upgrades, cash-back programs and other incentives. In return, premium cards often carry higher monthly fees, and require the cardholder to meet certain credit score requirements.
Limited-Purpose Credit Cards: Also known as specialty credit cards, these are the cards offered at large box stores and other retail outlets to entice you into spending your money at their store and their store only. Limited-purpose cards have no purchasing power beyond the walls of the issuing store, but they can be a great way to build up your credit-worthiness if you are a student or young newlywed. Advantages often include no-interest purchases for periods as short as six months up to three years or more. But be careful: One missed payment and all of the interest payments that you were avoiding automatically are applied to your next bill.
Secured Credit Cards: These cards are usually offered by a bank or other lending institution, and require you to make a deposit in an account that will reflect the amount of credit available on your card. For example, if you open a bank account for $500 with a secured credit card attached to the account, you will have up to $500 available on your new credit card. Secured credit cards are often used by people with no credit or poor credit who want to build up or repair their credit histories. Just like a standard credit card, the cardholder is required to make monthly minimum payments to the outstanding balance each month, along with interest payments.
Prepaid Credit Cards: A prepaid credit card is actually a form of gift card, in which money is loaded onto the card when purchased. In many ways, it is a debit card with the power of a large lending institution behind it. VISA, American Express and MasterCard all offer prepaid credit cards, allowing the card holder the benefits of a credit card (e.g., the ability to shop online) without going into debt. However, there can be fees associated with using the cards, including a charge for ATM withdrawals, as well as a charge for simply buying the card beyond the card’s face value.
Charge cards: To be fair, charge cards are not true credit cards. Charge cards are analogous to paying for items with cash, without the worry of carrying cash around with you. Charge cards require the cardholder to pay balances in full at the end of each month, thus eliminating the "minimum payment due" feature on credit cards. Late payments can result in stiff penalties or a complete cancellation of the card. The American Express Card is a charge card; VISA and MasterCard are credit cards.
One important thing to remember with any type of credit card is that, if you pay your balance in full and on time each month, you will not incur any interest charges. But you will still be responsible for paying the annual fee for the card, if there is such a fee.
When you get an offer for a credit card, take the time to make sure you know exactly what type of card it is, what it entails and what your responsibilities will be. Just because a card gives you the power to spend money you do not have does not mean that you should!
If you want more credit, check out MoneyTips' list of credit card offers.
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