Credit cards can be excellent money management tools. If used responsibly, they can help you build great credit and that can help you save money on mortgages, car loans, health insurance, and more. There are many different types of cards and you'll benefit the most by choosing the type of card that matches your needs.
Let's take a look at the main categories so you'll know what your options are:
These are also called "plain vanilla" cards. These cards don't have rewards (they're plain!), but they often have good benefits, such as travel insurance or a concierge. The perks will vary by card, so you'll have to read the fine print carefully to know what you're getting. The plus side? Plain vanilla cards often have very low interest rates (APRs) and it's nice to have one of these on hand in case of a financial emergency.
By the way, an emergency isn't a beach vacation no matter how stressed out you are! An emergency is a new roof, two kids in braces at the same time, sudden unemployment, and so on.
Balance transfer cards
If you have debt on a card with a high APR, then transferring your balance to a card with a zero percent APR introductory offer is a good idea. Now, you need an excellent FICO score to qualify for the best deals. But if you do qualify, you'll have an opportunity to pay off (or at least reduce) your debt for a specified time period.
Balance transfer offers usually last for six to 18 months, but occasionally, you'll see offers for 21 months. Note that if you still have a balance at the end of the intro period, you'll pay interest on it at the purchase APR rate, which is also known as the "go-to rate."
If you pay your bill in full every month, it's possible to make a profit by using rewards cards. Another key to making money from your cards is to match the rewards to your lifestyle. For instance, if you drive a lot, a gas rebate card might be your best bet. Bottom line? If you choose the type of rewards you'll benefit from the most and pay your balance in full every month, you really can profit from rewards cards.
There are many types of rewards, so here's a brief overview of each one. Note that you must read the fine print regardless of which type of card you get. There are often limits on rewards by category as well as exclusions you need to be aware of.
Cash back cards: If you want to save money on everyday expenses, then consider cash back cards. Some cards focus on specific categories, such as department stores or grocery stores, but some of these cards give a set percent for all purchases. For instance, you might get a card that offers 2.5 percent cash back on all purchases.
There are also cash back cards that offer rotating categories. The categories change quarterly so you get a variety of rewards. For example, for one quarter, you might get 5 percent off on Amazon.com purchases and movie theaters. It's important to know that you usually have to sign up each quarter to get the rewards. And watch out for caps on the amount of rewards you can earn.
Gas cards: These cards are sometimes branded by a gas station, such as Shell. But you can also find gas cards that are issued by a major bank or financial institution. And sometimes a cash back card will feature extra rewards on gas purchases.
General travel rewards cards: These cards are an excellent choice if you travel frequently, but you want to choose your airline each time. Sometimes people switch airlines to save money. But sometimes they just want to be able to choose the most convenient flight.
General travel rewards cards also tend to have a good assortment of redemption options as well as nice benefits. So if you want flexibility while traveling, these cards might be a winner for you.
Airline miles: If you travel on one airline fairly exclusively, then an airline-branded card might be a good choice. You'll often get a generous rewards program as well as intangible benefits, such as priority boarding. Often, there are tiers and you can earn extra rewards the more often you use the card.
Hotel: If you prefer to stay at a specific brand of hotels, then a hotel-branded card might work out for you. Hotel cards tend to have excellent rewards program along with perks such as late checkout times. As with airline-branded cards, hotel cards often have tiers where you can attain better benefits and free nights as you climb the rewards ladder.
Student cards: These cards are designed for college students. If you have a limited history and you feel that you can handle the responsibility, then these cards are a good way to build credit. Be aware that many issuers will check to make sure you're enrolled in college classes. These cards truly are for enrolled college students only. And if you're under 21, you'll have to show that you have sufficient income to pay your debts.
Retail cards: The downside of retail cards is that the interest rates are usually high. Some consumers use retail cards as a way of building history and that's a decent idea as long as you don't carry a balance. Also keep in mind that the limits tend to be low and if you use more than 30 percent of your limit, it could lower your FICO score.
Retail salespeople are trained to ask if you want to open a card when you are at the cash register with the items you want to buy. It's never a good idea to apply for a card while you're standing at the cash register. If you do have an interest in a specific retail card, do your homework before you go to the store and review the terms online. If you've already reviewed the terms and vow not to carry a balance, then you can consider saying "yes" when you're asked if you want to open an account and save 15 percent.
Secured cards: Used responsibly, these cards are a terrific way to build—or rebuild—your credit. You put a deposit in a bank account and that "secures" the card for you. The deposit stays in the bank and you use your card the same way you'd use any card.
You're actually using credit so as long as the issuer reports your payment history to the credit bureaus, you can improve your score and build a good history.
Subprime cards: Unsecured cards aimed at the subprime market usually have really high interest rates. In general, a subprime FICO score is below 640, although some may define it as below 660. The exact score where subprime begins depends on how it's defined by the lender.
With these cards, you have to read the fine print carefully because sometimes there are predatory lenders in this category. That means you might see cards with monthly maintenance fees, high annual fees, application fees, and more. So choose carefully if you go this route. If you have the money for a deposit, secured cards often have better terms than subprime unsecured cards do.
Prepaid cards: The number of prepaid cards on the market has really exploded over the past several years. The problem with these cards is that they often have high fees so you have to really understand the terms and look for costs.
Be aware that these cards also don't help you build credit. They're best used as a temporary measure by those who can't qualify for a checking account or by those who don't have a credit card for whatever reason.